T
THE COMPETITION ACT 1998: PRACTICAL ADVICE AND GUIDANCE
Susan Singleton
IFC
A Hawksmere Report
THE COMPETITION ACT 1998: PRACTICAL ADVICE AND GUIDANCE
Susan Singleton
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The author Susan Singleton is a solicitor, with her own firm, Singletons. She is one of the most active speakers on competition and commercial law in the UK.During 2000 she spoke at about 50 conferences,including extensive in-house training to British businesses on the then new Competition Act and she was part of the team providing training to the Office of Fair Trading under the new Act in 1999/2000. Most of her work however consists of legal advice to clients on competition and related areas of law and recent work in the competition field has included major commercial court litigation in a damages action under Articles 81 and 82, OFT complaint under the 1998 Act, drafting of compliance programmes and regular advice on contracts and drafting to ensure compliance with the law. She has a particular interest in the computer industry and intellectual property rights and competition law. Susan is the author of over 20 legal books from Pitmans’s Introduction to Competition Law (1992) to Blackstone’s Guide to the Competition Act (1998). Her latest books have included E-commerce – a Practical Guide (Gower 2001) and the second edition of Tolley’s Business the Internet and the Law (2001).Other recent works include Butterworths’ Commercial Agency and Jordan’s Data Protection, the New Law. She is editor of Informa/Monitor Press’ IT Law Today and new Telecoms Law Today newsletters and Croner’s Purchasing and Supply Briefing. On the competition side she edits Kluwer’s Comparative Law of Monopolies looseleaf and is on the committee of the Competition Law Association and Licensing Executives Society (EC Laws Committee). Singletons welcomes clients of any size. Contact: Susan Singleton Singletons Solicitors,The Ridge South View Road, Pinner Middlesex HA5 3YD Tel: 020 8866 1934 • Fax: 020 8429 9212 Email:
[email protected] • Web: www.singlelaw.com
Preface Competition law is a strange beast. Many a business chooses to ignore it entirely, although many wish they had not when a large fine is levied. Others breach it inadvertently because of the obscure nature of some of its provisions. Some companies find themselves liable because an errant employee thought he or she might make their own life easier and their targets more achievable by reaching covert agreements with competitors.In some industries price fixing seems endemic. In others there is not a hint of it.Neither is competition law new.In the USA similar rules have operated for over 100 years and the UK has had legislation since the 1940s at least. However, new means of communication, larger concentrations of market power and globalisation of business have brought new opportunities for collusion and abuse of a dominant position.It is not surprising that the competition authorities are redoubling their efforts at enforcement in the new environment. The UK Competition Act has been in force since March 2000 and has brought with it rigorous new investigative powers and impressive powers to levy penalties. This Report describes the new law. It also makes reference, where relevant to EU competition law, to Articles 81 and 82 of the Treaty of Rome.The penalties for breach are high. In December 2000 JCB was fined 36.9 million euros for breach of the EU rules (it intends to appeal). Other recent fines have included the Volkswagen case,where a fine of 90 million euros was levied and Opel Netherlands (43 million euros ).Fines of millions of euros are not uncommon.There is no reason to suppose that the UK Office of Fair Trading (OFT) will not levy similar fines, although to date no penalties have yet been imposed.The potential fines are reason enough for businesses to take serious note of the legislation. This Report aims above all to be practical. It does not cover merger law – an important but rather separate area of competition law. Instead it concentrates on what is allowed and what is not, what is advised to ensure compliance and how to make complaints. However it is not a substitute for individual legal advice.There are traps for the unwary in competition law.The best guides will show readers when they need to seek advice – what clauses to look for in contracts, which provisions should sound warning bells in the reader’s head – the clause akin to price fixing, the exclusivity arrangement which might cause problems or the non-competition restriction.Take advice in case the general provisions here are inapplicable to a particular case.Wherever possible the Report indicates where the reader can find further information on a particular competition law topic – much of it on the Internet.
The Competition Act has been in force for almost a year.The OFT’s guidance notes under the Act have largely all been drafted and many British companies have begun the on-going process of educating staff on the legislation. This Report is up-to-date to 1 February 2001.It includes all recent guidance under the Competition Act 1998 issued by the Office of Fair Trading, the vertical agreements regulation of the European Commission in force since 1 June 2000 which provides exemption from the Competition Act, the new research, development and specialisation regulations (2658 and 2659/2000) and guidelines on horizontal agreements. The author welcomes comments on the text and can be contacted at:
[email protected], www.singlelaw.com Susan Singleton, LLB, Solicitor, Singletons
CONTENTS
Contents
1
INTRODUCTION
2
Summary of the Act and its provisions .........................................................2 Historical and economic context .................................................................5 The Treaties and the European Union ..........................................................5 Theories of competition................................................................................7 Competition law as a sword and shield ........................................................8 Exemptions and principal arrangements in court ......................................13 The scope of competition law ...................................................................17 Cases illustrating the scope of competition law .........................................21 Considering arrangements under competition law ....................................25 Further information ....................................................................................25
2
ANTI-COMPETITIVE AGREEMENTS
27
Areas to watch ............................................................................................28 Agreements .................................................................................................32 Individual exemptions ................................................................................38 List of Guidance Notes and Legislation of the Office of Fair Trading .........40 Further information ....................................................................................43
CONTENTS
3
COMMON CONTRACTS
44
Vertical agreements ....................................................................................45 Agency agreements ....................................................................................48 Research and development, specialisation regulations and horizontal agreements ......................................................49 Selling a business ........................................................................................53 Land agreements ........................................................................................54 Patent and know-how licences ...................................................................60 Other intellectual property agreements .....................................................65 Further information ....................................................................................66
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ABUSE OF MARKET POWER
67
Introduction ...............................................................................................68 Dominant position ......................................................................................69 The relevant market ...................................................................................70 Abuse of a dominant position ....................................................................74 Conclusion .................................................................................................88 Further information ....................................................................................89
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COMPLIANCE AND ENFORCEMENT
90
Compliance measures ................................................................................91 Compliance programmes ............................................................................93 Further information ....................................................................................97
CONCLUSION
98
Introduction SUMMARY OF THE ACT AND ITS PROVISIONS HISTORICAL AND ECONOMIC CONTEXT T H E T R E AT I E S A N D T H E E U R O P E A N U N I O N THEORIES OF COMPETITION COMPETITION LAW AS A SWORD AND SHIELD E X E M P T I O N S A N D P R I N C I PA L A R R A N G E M E N T S I N C O U RT THE SCOPE OF COMPETITION LAW C A S E S I L L U S T R AT I N G T H E S C O P E O F C O M P E T I T I O N L AW CONSIDERING ARRANGEMENTS UNDER COMPETITION LAW F U RT H E R I N F O R M AT I O N
chapter
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Chapter 1: Introduction The EU and UK competition rules contain a strict framework within which companies must operate. Failure to comply can lead to heavy fines.This chapter provides a general introduction to the system and application of the rules and highlights some of the main areas where companies can be caught out through breaching the rules.The Competition Act 1998 is the most radical change to UK competition law since the Second World War.It marks a sea change in Government powers.From a position of relative weakness,with no rights to fine for a first offence and very poor investigative powers, the OFT has now been given rights to raid companies,even without notice and to levy penalties of up to 10 per cent of turnover.
Summary of the Act and its provisions Why is the Act so important? •
Because your business may be in danger of being fined up to 10 per cent of its UK turnover.
•
Because your business may be a victim of others’ anti-competitive behaviour and if you don’t know the rules you won’t be able to protect yourself.
•
The Act is introducing new competition rules which prohibit agreements and business practices and conducts that damage competition in the UK.
•
The new rules are designed to ensure that UK businesses remain competitive.Complying with them will help to ensure that your business is as competitive as it can be – which is good for you and good for consumers. Make sure your employees know about the new rules.
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Who does the Act apply to? Businesses of all types and sizes – even sole traders.
What does the Act prohibit? Anti-competitive agreements and the abuse of a dominant position in a market. The Act prohibits agreements and practices that prevent, restrict or distort competition – or are intended to do so.These can be formal agreements or informal, written or spoken.
How will the Act be enforced? The Director General has wide-ranging powers to investigate suspected breaches. His officials can enter premises and demand relevant documents, and may even get a warrant to make a search.Offending agreements or conduct can be ordered to be terminated.
What if my business is a victim? The OFT welcomes complaints from anyone who suspects the rules are being broken.You can complain in writing or by telephone and your identity can be protected. However, you will be asked for evidence to support your complaint. The OFT may launch a formal investigation if there are reasonable grounds for suspecting that the rules are being or have been broken.
What if my business is involved in a cartel? You can be fined up to 10 per cent of your UK turnover. Prohibited agreements will be void and unenforceable, and any third party harmed by an unlawful agreement or conduct may be able to sue you for damages. The OFT’s top priority is to detect and act against cartel activity, such as price fixing and market sharing. If your business is involved in a cartel, and you blow the whistle,you can receive a significant reduction in any fine.You can get complete immunity from financial penalties if you are the first to come forward.
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What if my business is investigated? The OFT has a range of powers to enable it to obtain documents and information to establish whether or not an infringement of the Act has been committed.This material can be obtained through a written procedure or by entering the premises of the undertaking being investigated.The OFT has produced an information leaflet outlining its procedures for investigations and advising businesses that are being investigated.
When does it all start? The prohibitions are fully in force from 1 March 2000.But many agreements made before that date will benefit from a further transitional period of at least a year during which the Chapter I prohibition will not apply to them. Further details are available in the guideline.1
Outline of Competition Law Chapter I of the UK Competition Act 1998 prohibits anti-competitive agreements. Article 81 of the Treaty of Rome does the same thing.UK businesses need to comply with both sets of laws. Competition law cannot safely be ignored.Knowledge of the law and its application in practice strengthens the competitive position of companies operating in Europe. The law in this field is vigorously enforced by the Office of Fair Trading (and throughout the EU by the European Commission) through a system which permits raids of business premises and the levying of fines of up to 10 per cent of turnover. Competition law potentially affects all business transactions and methods of carrying on business throughout the member states. This Report: •
describes the application of UK competition law to agreements and business practices
•
shows how the law applies in practice to those areas and how to minimise the risk of infringement
•
offers practical solutions or compromises in typical circumstances where competition law appears to prevent a proposed business arrangement.
1 Reproduced with permission from the Office of Fair Trading
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Historical and economic context Although modern competition law has developed since the Second World War, the courts have considered restrictions as being in restraint of trade at common law since about the year 1200 in the UK.The US was the first major jurisdiction to embody competition law into statute in the form which is familiar today through the Sherman Act of 1890.This law was developed to break ‘trusts’or anti-competitive cartels,formed by groups of major manufacturers in particular industries as loose organisations, to ensure that high prices and favourable terms were retained wherever possible. In the EC the Treaty of Rome was signed on 25 March 1957.This was preceded by the Organisation for European Economic Co-operation (OEEC), which dealt with the allocation of Marshall Aid after the Second World War.The OEEC did assist with the liberalisation of trade within Europe, but was not a body with powers over individual European nation states. Shortly after the formation of the OEEC, the Council of Europe was formed in 1948, but again this body had no legislative powers. It was not until the Treaty of Paris was signed, forming the EC’s Coal and Steel Community, in 1951, that competition law at EC level was first promulgated. Articles 65 and 66 of the Treaty of Paris contain provisions similar to Articles 81 and 82 of the Treaty of Rome.The Treaty of Paris was a foundation stone upon which the Rome Treaty was based.The removal of trade barriers was, of course, one of the principal aims of the Treaty of Rome, but its aims could be impeded if large monopolistic suppliers were free to restrict markets or otherwise impose their own trade barriers. It was, therefore, not surprising to find that the treaty prohibited the division of markets by agreements between companies and curtailed the activities of companies which enjoyed a dominant position.
The Treaties and the European Union The competition rules are contained in the Treaty of Rome.They have direct effect in the EC member states.The Treaty of Rome was amended by the Single European Act,February 1982 and came into force in 1987.Further amendment was effected by the Treaty on European Union (signed at Maastricht in February 1992),which came into force in November 1993.The Treaty of Amsterdam also made changes, not least changing the numbering of the treaty provisions including those on competition law from Articles 85 and 86 to Articles 81 and 82. EC competition law has not, however, been modified in any way by subsequent treaties, which have been aimed at creating closer integration within the Community.
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The Treaty on European Union extended the scope of the Treaty of Rome beyond economic issues to social and monetary policies and other areas.It resulted in the abolition of the term ‘European Economic Community’ and its substitution with the phrase ‘European Community’. It also founded the European Union. However, the competition rules do not emanate from the Treaty on European Union and cannot accurately be described as ‘EU competition laws’,therefore,this Report throughout uses the abbreviation ‘EC’ where reference is made to the competition rules.
The Treaty on the European Economic Area This Report describes the competition rules of the Treaty of Rome in the now 15 EU states. However in addition, Iceland and Norway combined with the 15 member states, comprise the European Economic Area which came into force on 1 January 1994.This forms a free trade area linking the 15 EU states, Iceland and Norway in a single market.The Treaty on the European Economic Area contains competition laws in Articles 53-60 broadly similar to those in Articles 81 and 82 of the Treaty of Rome.These provisions apply where trade between EC member states and one of the named EFTA states is affected.
The Courts The European Court of First Instance (CFI) hears appeals from decisions of the Commission in the competition law field.Appeal from the CFI is to the European Court of Justice (ECJ).Under the Treaty of Rome the court has jurisdiction to take decisions on matters referred from the national courts too.The judges in the ECJ are assisted by Advocates General,who produce an opinion for the Court,which is published and rarely varied in the final decision.The Advocate General’s Opinion in a competition law case usually contains more detail and reasoning than the final decision of the ECJ itself.
UK competition legislation The Competition Act 1998 took over ten years to reach the statute book.Originally proposed in a 1989 white paper by the Conservative administration, it was in the end introduced by the Labour Government. It replaced: •
the Restrictive Trade Practices Act 1976 and 1977
•
the Resale Prices Act 1976
•
much of the Competition Act 1980.
UK merger law under the Fair Trading Act 1973 is substantially unchanged by the 1998 Act.
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EC merger law There is a separate Merger Task Force which considers EC mergers notified to the Commission under the Merger Regulation 4064/89.The essence of the EC law in that field is that large EC mergers with a community dimension must be notified to the Commission in advance before the merger takes place. This Report does not consider that area of EC competition law which addresses mergers, which is a discrete area of competition law covered by other works. In the UK the Fair Trading Act 1973 entitles the Competition Commission (formerly the Monopolies and Mergers Commission) to investigate ‘qualifying mergers’.
Theories of competition The regulation of agreements freely entered into by companies is an interference with the free market, which is deemed justifiable in the interests of consumers. The advantages of competition in a market are that companies, in competition with others,have a greater incentive to produce better products to obtain greater market share. More will be spent in those circumstances on research and development and consumers will receive better products which they require in what is known as ‘allocative efficiency’. Competitors will be subject to constant pressure to keep costs, and thus prices, down.Savings in production costs are made and productive efficiency achieved. One of two extremes is the economist’s model of a perfect monopoly,which will usually only exist where state intervention has ensured that one entity enjoys 100 per cent market share.Neither similar nor competitive goods or services exist to compete with the company enjoying the perfect monopoly. The other extreme is pure competition,where there are so many competitors that each has a minuscule market share and no influence over price levels or the quantity of goods produced or sold.Pure competition rarely exists.More common is oligopoly where competition remains but only between a very few players on a particular market and competition is less sharp. A market enjoying workable competition is also often found. Here competition exists on the basis of price or other factors, but some companies have sufficient influence on the market such that pure competition cannot be said to apply. Without laws regulating the activities of companies enjoying some measure of market power,companies would have no legal check on their excesses.There may be market sectors in which no competing products exist. Consumers could be obliged to accept ancillary goods which they did not require or might have imposed upon
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them discriminatory conditions.The largest entities in each EC member state could enter into market-sharing cartels,against which the purchaser would be powerless. Competition law seeks to prevent this occurring. The Organisation for Economic Co-operation and Development summarised the aims of competition law as follows: ‘Competition policy has as its central economic goal the preservation and promotion of the competitive process, a process which encourages efficiency in the production and allocation of goods and services, and over time, through its effects on innovation and adjustment to technological change, a dynamic process of sustained economic growth.In conditions of effective competition, rivals have equal opportunities to compete for business on the basis and quality of their outputs, and resource deployment follows market success in meeting consumers’ demand at the lowest possible cost.’ (Competition and Trade Policies:Their Interaction, OECD 1984). Competition law is one of the most important elements in the EC single market. If companies were free to divide the Community along national boundaries, in particular, by remaining free to restrict the flow of goods across borders, the Community would remain a series of separate markets.The competition rules are one of the foundation stones of the single market,ensuring that companies operating in the EC may compete fairly on the so-called ‘level playing field’. Other EC legislation,such as directives harmonising EC law also play a large part in ensuring that all companies are subject to the same regulatory, product and trading rules.
Competition law as a sword and shield Although competition law should be welcomed by companies as an important legal protection against the tyranny of dominant corporate power, all too often its effects impose a considerable burden on businesses.Agreements need to be vetted and staff educated.What appear to be sensible commercial measures or agreements to ensure orderly markets cannot be effected. Commission officials can arrive unannounced with powers of entry to company premises with rights to search files for evidence of anti-competitive agreements. Solicitors need to be instructed and vast amounts of management time needs to be dedicated to answering requests for information from the Commission. However,competition law does have its uses.Increasingly competition law defences are submitted in litigation.As restrictions in agreements will be unenforceable where they infringe Article 81 or the Chapter I prohibition in the UK Competition
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Act 1998,companies wishing to be relieved of their obligations under commercial agreements may be able to plead Article 81/Chapter I as a complete defence. For example,a company may be subject to a restriction on selling in a particular European market.The restriction may be unenforceable. Alternatively, a business may wish to expand into another business area much coveted and guarded by a close competitor, which, on learning of the proposal, reduces its prices selectively. Such ‘predatory pricing’ may involve an abuse of a dominant position. In many cases the mere threat that a complaint may be made to the European Commission is sufficient to ensure that the proposed pricing policy of the dominant company is abandoned. Similarly if a company is refused supplies,or possibly even a licence of technology, an alleged breach of competition law can be identified and used as a method of ensuring that supplies are resumed or technology licensed. Companies can play on the paranoia which many companies, often justifiably, have on the subject of competition law. If the threat fails then there are also rights to sue for a breach of Articles 81 and 82 in the national courts. In December 1992 the European Commission issued a notice (93/C 39/05,OJ 1993 C39/6) aiming to encourage actions before the national courts.The notice identified the advantages of such actions over bringing a case by way of complaint to the Commission as: •
the ability to obtain immediate injunctions to bring the offending activity to an end
•
the ability to obtain damages to compensate the plaintiff for the losses suffered through the operation of the restrictive agreement or the abuse of a dominant position
•
the advantage of being able to include in the claim not only EC competition law but also national competition and other laws.
In 2000 progress was made in major legal changes at EC level to remove the system of notification to the Commission of agreements and to devolve more power to the national courts. Few actions for damages have been successfully concluded in the national courts. In theory the national courts could play a bigger role in EC competition law enforcement.The European Court of First Instance,in a decision called Automec v.Commission (Case T-24/90,17.9.92.,[1992] 5 CMLR 431) established the principle that the Commission has discretion only to investigate some, rather than all, complaints made to it concerning infringement of the EC competition rules. Competition law cases are often political as much as legal and some national courts would prefer to refer questions and, thus, the final decision in a case, to the ECJ
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to avoid having to reach unpopular decisions. Increasingly they may be called upon to do so, with cases being referred back to the national courts by the ECJ, which simply sets out the principles to be applied by the national courts, as in the Corbeau decision (Case C-320/91,19.5.93.,OJ 1993 C172/6) and the various UK Sunday trading cases. The role of the national courts is,therefore,likely to grow over the next few years, whether those courts wish to take on this additional area of responsibility or not. Increasingly national judges are undergoing education programmes to inform and update them concerning EC law. In the UK the principle that actions for damages for breach of EC competition law are possible was established in the Garden Cottage Foods Limited v. Milk Marketing Board case ([1983] 3 CMLR 43, [1983] 3 WLR 143) by the House of Lords in 1983. In that case the Milk Marketing Board refused to supply Garden Cottage Foods with bulk butter which,prior to the refusal to supply,Garden Cottage Foods had been purchasing from the board and reselling in the Netherlands.The court stated:‘A breach of the duty imposed by Article 82 not to abuse a dominant position in the Common Market or in a substantial part of it,can thus be categorised in English law as a breach of statutory duty that is imposed not only for the purpose of promoting the general economic prosperity of the Common Market but also for the benefit of private individuals to whom loss or damage is caused by a breach of that duty’. Yeheskel Arkin v.Borchard Lines Ltd and Others ([2000] UKCLR 495,High Court, 11 November 1999) confirmed that someone who suffers loss by reason of breaches of Articles 81 and 82 has a private right action analogous to a claim for breach of statutory duty which arises when the breach causes damage to the claimant, a case which is still proceeding at the date of writing. However actions for damages are rare and expensive and few in practice take place.To date none have to the writer’s knowledge been brought for breach of the UK Competition Act 1998 which has a similar effect. Not only can actions for damages be brought but also applications for an injunction to prevent the dominant company abusing its dominant position can be made to the court. In 1989 operators of telephone chatline services alleged in the UK that British Telecommunications plc would abuse its dominant position by suspending their services.In that case the application for an injunction was refused, but the possibility of injunctive relief should always be considered. In Germany in the BMW case (KZR 21/78) the German courts held that actions for damages for breach of EC competition law were possible in Germany.In many cases competition law is one element in a defence or action and can skilfully be
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incorporated in proceedings tactically to gain time or complicate the action for whatever reason. In some cases it can be advantageous for a defendant to use an Article 81 or 82 defence and at the same time make a complaint to the European Commission. The Commission in its notice on co-operation between the national courts and the Commission issued in February 1993 sought to encourage use of the national courts and stated that it would refuse to handle complaints unless they were of particular political, economic or legal significance for the Community. It is, thus, necessary to show such significance in bringing a complaint, but in practice the threat of a complaint can often be sufficient to achieve the result desired. In its notice the Commission made it clear that it is possible to bring simultaneous proceedings before the Commission and in the national courts where this does not impair the effectiveness and uniformity of the competition rules. In commercial negotiations competition law can be of use where one party seeks to impose a restriction on the other.The party to be restricted can plead competition law as the excuse for avoiding a commercial restriction which is unacceptable.
‘Third parties who consider that they have suffered loss as a result of any unlawful agreement or conduct have a claim for damages in the courts.’ OFT COMPETITION ACT GUIDELINE 400, PARA. 12.6.
Proposals for change On 27 September 2000 the European Commission adopted a proposal for a Regulation implementing Articles 81 and 82 of the Treaty, which set out the Community competition rules applicable to restrictive practices between businesses and abuses of dominant positions committed by them.The proposal is intended to replace the current system – in force since 1962 – of administrative authorisation that is centralised at Commission level by one in which not only the Commission but also the national authorities and courts will be able to apply Article 81 in full. The proposal will affect the Competition Act 1998 which contains provisions relating to exemptions given individually by the Commission under article 81(3). If those EU exemptions are no longer available then it is possible the Act may need to be altered. The EU proposal amends extensively the arrangements for implementing Articles 81 and 82 of the Treaty. It does not concern state aid or merger control.The new
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text will replace Regulation 17 of 1962, which is one of the cornerstones of Community competition law but which the Commission says,after close on forty years of existence,needs to be adapted to a much different economic and institutional environment. The proposal will need to be adopted by the Council, with Parliament being consulted. In April 1999 the Commission adopted a White Paper mapping out the broad lines of the proposed reform. The proposal adopted today takes account of the contributions from the European Parliament and the Economic and Social Committee and of the numerous observations received from the national authorities and industry.The Commission is proposing a system in which, as they are already able to do in the case of Article 82,the national competition authorities and courts will be able to apply Article 81 in its entirety.The competition authorities and the Commission will form a network and work together to punish infringements of the Community competition rules. National courts will protect the rights that individuals enjoy under Community law by awarding damages or ruling on the enforcement of contracts. The proposal will extend the power to apply Community law in full to national competition authorities and courts, the Commission says. In the run-up to enlargement a decision is needed since a single institution – the Commission – cannot on its own ensure that Community rules are complied with.The current system involves the notification of agreements to the Commission, which alone is empowered to authorise those that restrict competition.The OFT is also keen to discourage notifications (its £5,000 notification fee is a deterrent for many). One of the key aspects of the proposal is the application by all decision-making authorities of a single rule of law whenever trade between Member States is affected. In future, businesses will no longer have to contend with sixteen distinct legal systems; they will be faced with a single Community instrument whenever their activities affect trade between Member States.This will guarantee them a level playing field throughout the Community and will reduce compliance costs significantly. In addition, abolition of the notification system will ease the administrative constraints imposed on them by the current system. Further information on the proposal can be found at: www.europa.eu.int/comm/competition/antitrust/others/
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Practical examples The examples below are based on successful uses of competition law by the writer in her practice. Names have obviously been changed. Refusal to supply A parts manufacturer abroad cut off supplies from their UK client.They helpfully told the UK client in writing that the reason for refusal to supply was the client’s low resale pricing.However attempts to influence resale pricing in such a manner and the cutting off of supplies breaches UK and EU competition law. Solicitors’ letters were sufficient to ensure supplies were resumed. Prices too high A UK franchisee was reselling franchise product bought from a franchiser at a price higher than the resale price the franchiser wished to impose.Maximum resale price maintenance is in fact allowed under the Competition Act but stipulating the resale price is not.The client was allowed to continue selling at the higher price. Software licensor A software copyright holder refused to license a client with copyright but had licensed others who did not compete as effectively. Letters succeeded in ensuring a licence was granted on the grounds that refusal to licence might amount to an abuse of a dominant position.
Exemptions and principal arrangements in court Many common contracts are exempt from the Competition Act 1998. In many cases this is because they fall within an EU exemption regulation by virtue of the Competition Act s.10(1)(a). Articles 81 and 82 of the Treaty of Rome have spawned a considerable quantity of secondary legislation,such as regulations giving ‘block’ or general exemption to categories of typical commercial agreements and notices, and the Commission has elaborated on the impact of the legislation through its decisions in this field.The system of block exemption is of great importance.The Commission issues regulations for certain types of agreement, such as: •
Vertical agreements (exclusive distribution and purchasing agreements, selective distribution and franchise agreements) – regulation 2790/1999 (OJ 29.12.99 L336/21 which came into force on 1 June 2000 to be read with its important October 2000 guidance notes)
•
Technology transfer agreements (patent and know-how licensing – regulation 260/96)
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•
Research and development agreements (regulation 2659/2000, published OJ 5.12.00 L304/7)
•
Specialisation agreements (regulation 2658/2000,published OJ 5.12.00 L304/3).
(There are guidelines on horizontal agreements,particularly regulations 2658/9, which are relevant as well.) The regulations set out the restrictive provisions which are allowed, where the other requirements of the block exemption are met.Where an agreement contains restrictions which infringe the competition rules and no block exemption is applicable, then the restrictions must be removed or the agreement individually notified to the Commission under Article 81(3) for a specific exemption. The legislation catches the obvious price fixing and market sharing cartels,including agreements between companies or other business entities,as to the prices at which they shall sell their respective goods or the geographical markets in which they will concentrate their activities, and may apply to a vast range of commercial agreements where they contain restrictions of the sort which infringe the rules. Typical agreements,which ought to be examined closely to check whether their provisions infringe, include: •
exclusive purchasing and distribution agreements
•
intellectual property agreements
•
co-operation agreements or other joint venture arrangements
•
information exchange agreements
•
any agreements containing price restrictions or export bans.
Companies enjoying a major share of the market for a particular product within the EC or one major country of the EC may be regarded by the Commission as ‘dominant’ in that market.There are similar rules for companies dominant in the UK or a part of the UK,however small.Such companies need to exercise caution when: • refusing to supply products to customers •
discriminating between customers in the terms which they offer to customers
•
imposing excessive prices
•
imposing unfair terms
•
undertaking acts to drive a competitor out of a market
•
requiring customers to purchase goods which they do not want when buying other products.
These actions may comprise an abuse of a dominant position.
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Competition law looks to the economic effects of agreements or behaviour by a dominant company.This has the advantage in practice that agreements are not caught by the rules where they do not have significant anti-competitive effects. However, this also means that it is almost always necessary to undertake some economic analysis before it is clear whether or not competition law is infringed. The definition of the relevant market, the effect of an agreement on the marketplace, the market shares of the parties and their competitors, and the nature of the products concerned all need to be examined. Advising on these laws can become an exercise in risk analysis, given that few agreements fall squarely under the general or block exemptions which the Commission has issued for certain types of agreement. In an ideal world agreements would be drafted without the inclusion of restrictions curtailing the freedom of the companies concerned.However,in practice business people require the imposition of non-competition and other restrictions.The advantage of avoiding infringing competition law must be balanced against the loss of restrictions which commercially benefit the parties. The easy answer is to omit all potentially infringing provisions when drafting commercial agreements. The art is in drafting a provision which achieves the commercial ends sought, whilst limiting the risk of infringement. The risks of ignorance Few product areas are exempt from competition law and many companies have found to their cost that ignoring these provisions can result in the requirement to pay substantial fines. The consequences of infringing the rules are: •
Fines of up to 10 per cent of turnover in the preceding business year can be levied by the European Commission or UK OFT.
•
Restrictions in agreements caught by Article 81(1) will be void and cannot be enforced by legal proceedings.
•
Third parties damaged by the operation of the restrictive arrangement or abuse of a dominant position may sue the companies concerned in the national courts for damages (as mentioned above).
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Examples JCB: 39.6m euro fine On 21 December 2000 it was announced that the European Commission was fining JCB 39.6m euros. Since the late 80s, JCB has put in place distribution agreements and other practices which had the effect, the Commission said, of severely restricting out of territory sales of JCB’s products both within certain national territories and across national borders, as well as interfering with the freedom to set resale prices. During surprise inspections in November 1996, the Commission found evidence of the illegal agreements implemented by various companies of the JCB Group and, in particular, the JCB Sales organisation in the UK,JCB SA (France) and JCB Spa (Italy),all controlled by JCB Service.These illegal agreements or practices have been implemented in isolation or in combination between 1988 and 1998, according to evidence. The restrictive agreements or practices between JCB and its distributors consisted of: • restrictions on sales outside allotted territories •
restrictions on purchases of machines between authorised distributors in different EU states
•
bonuses and fees systems which disadvantaged out of territory sales
•
occasional joint fixing of resale prices and discounts across different territories.
There was evidence that the restrictions have been put in place in at least the United Kingdom, France, Italy and Ireland. Each of these measures and their combination were contrary to the ban on restrictive agreements under article 81(1) of the EC Treaty.The Commission said ‘As a result,import and export purchases and sales of JCB’s products have been severely restricted in the Member States more directly concerned and, consequently, within the European Community as a whole.Through such restrictions purchasers of JCB machines are illegally deprived of the opportunity to take advantage of substantial price differences for the same equipment in different Member States.’As a result, the Commission ordered JCB to lift the above measures and to bring its agreements and practices in line with EC competition rules applicable to distribution. Volkswagen: 90m euro fine JCB’s infringements are comparable to those verified in the Volkswagen case,where a fine of 102 million euros was imposed in 1998,subsequently reduced to 90 million euros by the Court of First Instance.
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Opel Netherlands: 43m euro fine The case is also similar to a recent case involving Opel Netherlands, for which a fine of 43 million euros was decided. Tetra Pak: 75m ecu (now euros) fine Tetra Pak was fined in July 1991 what was then a record 75m ecu (£57.8m).Tetra Pak is a Swedish liquid packaging company.It was fined for a large variety of abuses of its dominant position. Fines reflect not only the turnover of the companies concerned but also the length of time over which an arrangement was operated and the seriousness of the infringement of EC competition law. Although the cases above are under EC competition law,the UK regime is similar and heavy fines are likely to be imposed once the OFT has finished its investigations (no fines have been imposed at the date of writing). Although the fines are often high, for many companies the most important consequence of infringement is the adverse press publicity this attracts and the consequent damage wrought to the company’s goodwill. Significant amounts of senior management time will have to be committed to handling the questions raised by the Commission during an investigation. Solicitors will need to be instructed.
The scope of competition law This Report focuses on UK competition law. However, in addition to Article 81 and 82 mentioned above, other provisions of the Treaty of Rome are also worthy of note.No one should look at UK competition law in isolation.In the vast majority of cases the EU rules will also apply and must be complied with.The Treaty prohibits member states from enacting legislation contrary,in particular,to Articles 81 and 82, in the case of public undertakings and undertakings to which member states grant special or exclusive rights. Coal and steel are subject to the Treaty of Paris and a separate system, although measures, the equivalent of Articles 81 and 82 (Articles 65 and 66), of the ECSC Treaty exist. Ensuring fair competition within the EC would be difficult without the Community dumping measures and provisions concerning state aids.
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Dumping Dumping involves selling goods in one state at a price below their usual value in the country of origin.The General Agreement on Tariffs and Trade (GATT), Article VI, permits members of GATT to impose dumping duties on products exported from one country at a dumped price.Regulation of dumping has been in existence since the beginning of the century. The Treaty of Rome empowers the Commission to protect trade by taking such measures as ‘in the case of dumping and subsidies’.The Commission’s regulation 2176/84 provides that a dumping duty can be applied to any dumped product whose release for free circulation in the Community causes injury.A product is regarded as dumped where its export price to the Community is less than the normal value of a like product.Normal value includes comparable prices at which the product is sold in the home market. Where a company suspects that products are being dumped on the EC market, it should gather together a dossier of information for presentation to the European Commission.Information should be obtained as to the prices at which the dumped products are being sold in the EC by the complaining company arranging for quotations or example purchases, by means which do not disclose the identity of the complaining purchaser. Price lists may be publicly available. The names and addresses of the dumping company or other entity should be ascertained and all relevant information which is collected dispatched to the European Commission, with a request that the matter be investigated urgently under the dumping regulation. Once the Commission has consulted an advisory committee and established that there is sufficient evidence upon which to initiate dumping proceedings, a notice is published in the EC’s Official Journal, giving a summary of the information received by the Commission. Interested parties then have the opportunity to comment and an investigation is begun.Eventually a dumping duty can be imposed on the dumped products.This is known as an anti-dumping duty,in the case of pure dumping and a countervailing duty where a subsidy has been found.
State aids State aids comprise government assistance to companies, whether in the form of capital contributions, other financial assistance or loans made available at a lower than normal interest rate.Any aid granted by a member state or through state resources which distorts competition in favouring certain undertakings or the production of certain goods, is regarded as incompatible with the common market where it affects trade between member states.
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The Commission has powers,on finding that aid is not compatible with the common market,to require the member state to abolish the aid within a particular timescale or a reference to the European Court of Justice can be made.The Commission may also require that an unnotified aid be suspended if a member state fails to reply satisfactorily to the Commission’s initial request for information. Every year the Commission receives over 100 notifications from companies of potentially unlawful state aids. As with dumping, the more information which can be supplied to the Commission the more likely that the Commission will take up the case in hand.The legislation has been held not to be capable of being invoked in the national courts, so an individual company could not bring proceedings in the national courts against the government or a company which has benefited from the aid. However, it is possible to seek a declaration that an aid, if implemented, would be contrary to the legislation. Increasingly the Commission is investigating state aids to service industries, particularly banking and insurance,and considering state aids to public enterprises. State aids and dumping legislation illustrate how competition law,which may often be seen as a bureaucratic interference in free business activities, can be used as a tool by businesses to ensure that they are treated fairly by their competitors within the EC.
Horizontal and vertical restraints Competition law affects both horizontal and vertical restraints.Some commentators question whether restrictions between companies operating at different levels in the distribution chain can be sufficiently anti-competitive to justify interference by the competition authorities. Clearly agreements between competitors, such as an agreement between two manufacturers who supply wholesalers, as to the prices at which they resell goods in competition with each other to the same potential customers can have a major anti-competitive impact. In 2000 new EU guidelines on both vertical agreements (13 October 2000 OJ C291/1) and horizontal agreements (to accompany regulations 2658/2000 and 2659/2000 on R&D and specialisation agreements OJ 5.12.00 L304/3 and L304/7 which came into force on 1 January 2001) were issued. OFT Competition Act 1998 Guideline 419 Vertical Agreements and Restraints (March 2000) describes the exemption from the Competition Act for ‘vertical agreements’. A vertical agreement is defined in the same way under the EU vertical agreements regulation 2790/1999 and under the Competition Act 1998 (Land and Vertical Agreements) Exclusion Order 2000.The UK exemption is wider, however. In practice few competition lawyers will be comfortable with reliance on the UK exemption though because as soon as there is an ‘effect on trade between
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member states’the EU rules apply and compliance with the stricter EU regulation is necessary. Agreements between a supplier and a dealer who do not compete with each other is a vertical restriction and does not appear immediately to be so anti-competitive. However,the supplier may have a network of similar agreements with other dealers which have the effect of carving up the market or the supplier may compete with the dealer were it not for restrictions imposed. Unlike some other anti-trust jurisdictions,the UK and EC regimes apply both to horizontal and vertical restrictions.
Barriers to entry and exit In assessing the anti-competitive effect of an agreement or arrangement the OFT or Commission will consider the ease of entry to the market by competitors or potential competitors.This is particularly important where an agreement is notified to the OFT or Commission for exemption,where it is accepted that the agreement infringes the rules,but the parties are seeking to convince the OFT or Commission that there are positive advantages to the arrangement,such that it operates to the advantage of consumers, for example and that it does not have a major anticompetitive impact. In determining these factors the extent of competition from third parties is examined. How easy or difficult it is for third parties to set up in competition is an important factor for the OFT or Commission in reaching its decision. One company with a large market share may propose to enter into an anti-competitive agreement with its major rival.The OFT will examine how easy or difficult it is for a third party to start up in the same business.The cost of setting up a plant, buying in skilled labour, acquiring technology etc are all relevant in this area. Barriers to exit are also of relevance.Companies proposing to begin a new business need to know how expensive it might be to leave the industry, such as the costs of shutting down a plant safely bearing in mind environmental legislation. Such barriers to exit are often relevant in determining whether to enter a new business area or not.
Summary of the uses of competition law •
As a defence in litigation.
•
As a means of ensuring supplies of products are restored, or prices of a dominant company adjusted, or otherwise modifying the behaviour of a dominant company.
•
As a means of securing a fairer agreement in negotiations.
•
As a right of action for damages or an injunction in the national courts.
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Acquiring a background knowledge of competition law gives commercial negotiators and business managers an extra lever in extracting from other companies the agreement or modification of behaviour sought.
Cases illustrating the scope of competition law BSkyB: Competition Act Inquiry The OFT launched a Competition Act investigation into BSkyB under both the Chapter I and Chapter II prohibitions in the Act in December 2000.It is investigating in particular BSkyB’s supply of wholesale pay-tv.The OFT reviewed undertakings the company gave in 1996 under earlier legislation.BSkyB had been released from one undertaking which deals with conduct now regulated by the Independent Television Commission and will shortly be released from another undertaking which only applies to analogue satellite TV. The OFT will examine whether the company has infringed either of the prohibitions in the Competition Act.The investigation is expected to take six months and has not been completed at the date of writing. The original 1996 undertakings were summarised as: •
Part I requires BSkyB not to bundle certain channels, and to publish a rate card showing its wholesale prices for cable companies, with a discount structure that the Director General has approved in advance. Absolute levels of prices do not require approval.
•
Part II is designed to regulate BSkyB’s conduct as holder of proprietary rights in the UK industry-standard encryption technology for analogue satellite TV.
•
Part III requires BSkyB to submit to the Director General accounts separated between its wholesale and retail businesses (dubbed ‘Broadco’ and ‘Disco’,respectively).In particular,it requires the accounts to show a notional charge for the supply of its channels to its retail business, to allow the Director General to determine if Disco makes a reasonable profit when ‘purchasing’ channels on the terms of the rate card.
The Undertakings were amended in February 1999,with retrospective effect from October 1998.The amendments principally reflected the Director General’s decision to remove from the wholesale rate card four of BskyB’s basic channels, which were considered not to involve market power. The rate card has been amended several times since the Undertakings entered into force.
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BA/Virgin The European Commission found an abuse by British Airways of its dominant position.BA offered a system of loyalty incentives based on the volume of tickets sold to travel agents in the UK.Virgin complained.This breached Article 82 and a fine of 6.8m euros was imposed.
Seamless steel tubes In 1999 the Commission fined steel companies between 8.1m and 13.5m euros. Eight manufacturers of seamless steel tubes, including British Steel, were found to have engaged in market and supply sharing practices which breached Article 81.
Tetra Pak This case resulted in the largest fine for competition law infringement in the history of the European Commission.The Tetra Pak II decision (OJ 1992 L72/1, [1992] 4 CMLR 551) was decided in July 1991 and concerned the activities of Tetra Pak, a huge Swedish multinational company involved in the liquid aseptic packaging market producing and distributing products such as milk cartons.Tetra Pak had extremely large market shares, in some markets over 90 per cent and there was no doubt that it held a dominant position. Purchasers of packaging equipment from Tetra Pak were prohibited in Italy from adding accessory equipment to the machines which they had bought and were forbidden to modify or move the machines without consent from Tetra Pak. Such restrictions may be acceptable where equipment is leased, but situations where title to the equipment has passed to a purchaser were regarded by the Commission as an abuse of a dominant position, contrary to Article 82. The Commission examined a considerable number of other anti-competitive practices, including: •
tying the purchase of milk cartons to the sale of machines
•
discriminatory pricing aimed at eliminating competitors
•
a marketing policy aimed at segregating national markets within the EC
•
the buying up of competitors’ machines
•
elimination of competitors from the market
•
depriving competitors of trade references
•
monopolising specialist advertising media
•
imposing pressure on suppliers to cut off supplies to competitors.
Tetra Pak was fined a record 75m ecu (£57.8m).
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Tipp-Ex Requiring distributors to notify their supplier of the customers to whom goods are sold is not an uncommon business practice and can yield extremely useful information concerning the market for particular products. However, it can also result in restrictive agreements which fall within the prohibition in Article 81. The Tipp-Ex case (OJ 1987 L222/1,[1989] 4 CMLR 425) was decided in July 1987 and concerned the distribution of correction products for documents, such as correction fluid,by the German company Tipp-Ex Vertrieb GmbH & Co KG through distributors in the EC. The supplier demanded to know to whom goods were ultimately sold by its dealers and exerted strong pressure on individual dealers, so the Commission found, threatening them with sanctions,if dealers did not assist the company in preventing the parallel importation of its products across EC boundaries.Parallel importation comprises the importation of products from one territory where they have been purchased to another, where they can be resold at a higher price than would be obtainable by resale in the territory of first purchase. Tipp-Ex had been careful to ensure that its dealer contracts within the EC did not prohibit the sale of its products outside the exclusive territory granted to the dealer (which would have infringed Article 81),but the Commission held that the requirement of detailed proof of identity of the final recipients of the goods and the carrying out of post-delivery checks were simply a means of ensuring absolute territorial protection, contrary to Article 81.Tipp-Ex was fined 400,000 ecu (£308,000) and its French distributor 10,000 ecu (£7,700).
Bayer Dental Express export bans are rare as most business people are aware that any attempt to carve up the EC single market geographically by restrictions in agreements will infringe Article 81. Companies have, however, sought methods of achieving a similar objective through less obvious means.In Bayer Dental (OJ 1990 L351/46, [1992] 4 CMLR 61) which was decided in November 1990, the actions of Bayer Dental, a division of the German company Bayer AG were considered. Bayer Dental distributes dental products manufactured by Bayer AG.Bayer Dental’s conditions of sale required that original packages might only be resold in unopened form and that the products were only intended for resale in West Germany.The conditions also contained a warning that reselling the dental products abroad might be prohibited according to the laws of the country to which the export was made,either because this would contravene registration regulations or involve a breach of national intellectual property rights.This was merely a statement of fact.The Commission held that these statements infringed Article 81(1).
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Belgian banking Trade associations provide a forum for the exchange of views and often present member companies with the opportunity to discuss and agree not only common industry concerns but also prices and terms and conditions. Such arrangement may well infringe Article 81.The next case concerns agreements concluded between members of a Belgian banking organisation concerning the commission charged for services.In the Belgian Banking decision,of December 1982 (OJ 1987 L7/27, [1989] 4 CMLR 141) such arrangements concerning commission were held to be restrictive agreements contrary to Article 81(1),although a specific exemption was granted in this case.
PVC Cartel EC competition law applies to non-binding,verbal and ‘gentlemen’s’agreements. In Re the PVC Cartel case (a Court of First Instance decision of February 1992, Cases T-79,84-82, 89, 91, 92, 94, 96, 98, 102 and 104/89) the Commission found that regular meetings of PVC producers took place, at which prices and market shares were discussed.The Court of First Instance (CFI) is the first court of appeal from Commission decisions. A further appeal is possible from the CFI to the European Court of Justice (ECJ). The individuals participating in the meetings had not felt that an agreement had been reached, simply an understanding and left the meetings feeling under no commitment to take any action discussed at the meeting.Despite this,the Court still held that the parties had entered into a restrictive agreement contrary to Article 81.
Hilti AG The last example concerns an abuse of a dominant position. No agreement is necessary for an infringement of Article 82.Article 82 applies where a company has a large market share or otherwise has a dominant position on a particular product market in the whole of the EC or a substantial part of the Community. In Hilti v. Commission (Case T-30/89, [1992] 4 CMLR 16) the CFI, in December 1991, upheld the earlier Commission decision in this case concerning Hilti AG, a manufacturer of nail guns. Nail guns are a power tool which drive nails into other materials and Hilti had a patent over the cartridge strips from which the nails were fired. It was held that Hilti abused its dominant position on the market for cartridge strips and nails compatible for use with Hilti’s own brand of nail gun by attempting to exclude independent producers of nails from the market.Tying the purchase of one product to the purchase of another is an infringement of Article 82(d).
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Considering arrangements under competition law In considering an arrangement under competition law the following points are worth consideration: •
Advice should be taken on competition law of all relevant jurisdictions. A quick telephone call or facsimile to local lawyers or even to subsidiary companies in the countries concerned should be sufficient to alert all parties early to any potential competition law problem.More substantial advice should be obtained later and all necessary national approvals obtained.
•
Competition law should be considered early as it may result in the deal being differently structured. A licence may be preferable to a joint venture or a proposed course of action may not be permitted at all. Having to change a transaction which has been negotiated over many months is clearly more difficult than ensuring, before talks begin, that the proposed structure does not unduly offend the law.
•
A commercial transaction should never be effected in a manner which is disadvantageous to the business of the company, simply to comply with competition law.It may be better that the transaction is abandoned.
•
It should be accepted that there may be no risk-free method of undertaking a transaction,given that competition law can be of uncertain application.However an analysis must always be undertaken of the extent of the risk being run and whether the provision concerned is of a type regarded as particularly iniquitous by the Commission or merely a minor issue in relation to which a fine is unlikely to be imposed.
•
An arrangement must never be entered into,whether in writing or orally and whether formally binding or not, which comprises competitors agreeing between themselves the prices at which they will sell their goods or the allocation of contracts between the parties.
Further information UK Competition Law Office of Fair Trading, Fleetbank House 2-6 Salisbury Square LONDON EC4Y 8JX Telephone: +44 (0)20 7211 8000 (switchboard) 08457 22 44 99 (general enquiries) 0870 60 60 321 (publication orders) Fax:
+44 (0)20 7211 8800
E-mail:
[email protected] 25
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See also the OFT web site at: www.oft.gov.uk clicking on the Competition Act section. The Competition Act Enquiry Line is on tel: 020 7211 8989, or e-mail enquiries:
[email protected] Blackstone’s Guide to the Competition Act 1998 (Susan Singleton) is available from Blackstone Press £21.95,ISBN 1 85431 867 5,see www.blackstonepress.com EC/Competition Lawyers are listed in the Chambers Directory at: www.chambersandpartners.com
EU Competition Law The European Commission’s competition web site includes all the EU legislation and it is accessible via www.europa.eu.int under Competition Directorate. Butterworths’ Competition Law Handbook is issued every year and contains all the legislation and OFT guidance notes in book form. The Competition Law Association holds regular meetings on competition law topics – telephone Jenny Block on 020 7236 2020 (
[email protected]) for details. The proposed new EU regulation as applies to notifications is at: www.europa.eu.int/comm/competition/antitrust/others/
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Anti-competitive agreements A R E A S T O WAT C H AGREEMENTS INDIVIDUAL EXEMPTIONS L I S T O F G U I D A N C E N O T E S A N D L E G I S L AT I O N O F T H E O F F I C E O F FA I R T R A D I N G F U RT H E R I N F O R M AT I O N
chapter
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Chapter 2: Anti-competitive agreements Chapter one set the scene in describing the background of competition law.This chapter looks at the Chapter I prohibition under the UK Competition Act 1998 (and Article 81 of the Treaty). UK businesses are subject both to UK and EU competition law.However the laws are very similar indeed so there is no difficulty for British businesses in complying with both. There are some differences of importance. Perhaps the most important in practice is that vertical agreements – agreements between companies at different levels of the supply chain – are treated differently. Under EU competition law they are exempted only when complying with the fairly strict regulation 2790/1999.Where the agreement only affects trade in the UK, and thus the EU rules do not apply, then the UK total exemption from the competition rules for such agreements applies and restrictions such as on sales outside a dealer’s territory would not be caught by UK competition law.However even under the UK exemption, regulation restrictions on price breach the law. Chapter three examines some particular contracts such as distribution agreements and licence of intellectual property.
Areas to watch For both UK and EU competition law, the following restrictions in agreements are likely to lead to a breach of the law or at the very least require consideration of the legal impact of the provisions and they apply whether or not the agreement is in writing, made by e-mail or by telephone. •
Price restrictions (e.g. competitors agree minimum or fixed prices or a dealer is told to resell at certain prices).
•
Exclusivity arrangements (e.g. company A agrees to keep out of South London if company B does not sell in North London). Sometimes an exemption for vertical agreements or some other regulation will exempt these arrangements but careful consideration is needed.
•
Non-competition restrictions (e.g.two joint venture partners agree not to compete with each other or a business is sold and such restrictions are agreed). Sometimes the restrictions are not bad enough to amount to a breach of the law, but specialist advice should be taken.
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However,the competition rules are very generally worded and the most relevant question is usually whether an arrangement restricts competition.If it does then a breach may occur,however the words in an agreement or arrangement are drafted.
UK competition law UK competition law is contained in the Competition Act 1998 which has been in force since 1 March 2000, which contains the law on restrictive agreements and abuses of a dominant position and the Fair Trading Act 1973 (mergers and investigation of monopolies). Every UK business will be subject to the Competition Act 1998 and many of those buying or selling businesses or enjoying large market shares will need to consider the Fair Trading Act 1973.
EU competition law EU competition law as it applies to agreements is contained in Article 81 of the Treaty of Rome. Article 81 prohibits anti-competitive agreements which affect trade between EU member states.
Guidance notes The Office of Fair Trading is in charge of competition law in the UK.There is a considerable amount of information on the law on the web site of the OFT at www.oft.gov.uk including all relevant legislation relating to the Competition Act 1998.The OFT has issued many guidance notes on specific areas of the Act which are listed under the checklist below.They are being added to all the time so the latest position should always be checked.
Small agreements/de minimis Many UK businesses have, often quite wrongly, ignored EU competition on the grounds that they are too small for it to apply or because their arrangements relate only to the UK. However the EU competition rules can still apply in such cases.
Agreements of minor importance The European Commission has a notice on agreements on minor importance which has the effect that that the EU rules are unlikely to apply where the parties have 5 per cent of the market (or 10 per cent for what they call ‘vertical’arrangements such as those between supplier and customer).This notice, known as the notice on agreements of minor importance, is much used in practice but over reliance
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on it is dangerous, not least because it is difficult to define relevant markets so that a client with a market share, say, of 2 per cent of the motor vehicle market might in fact have 30 per cent of the market for small cars and if the competition authorities treat the narrower market as the correct market then the 5 per cent or 10 per cent threshold will be exceeded. The second danger of over reliance on the minor agreements notice is that circumstances change and if market shares vary over the lifetime of an agreement then the EU competition rules may suddenly start to apply. For this reason many UK competition lawyers will advise that it is best to assume Article 81 will apply and draft agreement accordingly.
Effect on trade between member states The EU competition rules only apply where there is an effect on trade between EU member states. Many UK companies assume their UK agreements have no such effect and ignore the rules. However even a potential effect is enough for the EU rules to apply.
UK competition law and insignificance In their booklet‘How your business can achieve compliance – A guide to achieving compliance with the Competition Act 1998’ the OFT summarised their position on ‘small’ businesses. It stresses that compliance is important for all companies however small.There is limited immunity in the Act from financial penalties (fines) for small agreements and conduct of minor significance. However this does not mean the Act does not apply.Restrictions in contracts made by those companies could be void and third parties could sue for damages. In other words it is not a complete exemption. In any event where there is price fixing or market sharing then no matter how small the companies fines can be levied.
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‘As a general rule, an agreement is unlikely to have an appreciable effect on competition where the combined market share of the parties involve is less than 25 per cent in the market concerned. However, where the agreement fixes prices, shares markets, imposes minimum resale prices, or is one of a network of similar agreements that have a cumulative effect on the market in question, it is generally capable of having an appreciable effect whatever the market share of the parties. Whether an undertaking is in a dominant position will largely depend on its size and strength in relation to others in the market, but as a general rule it is unlikely to be considered dominant if its market share is less than 40 per cent.’ OFT GUIDANCE ON THE ACT
Immunity from penalties – £20m and £50m turnover tests The Act itself provides a definition of a ‘small agreement’(immune from penalties). The Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000 (SI 2000/262) provides that companies breaching the 1998 Act will not be fined if their combined applicable turnover is not over £20m for restrictive agreements and for abuse of market power over £50m.However this does not apply if there is any price fixing and also it only relieves companies from fines. It does not remove the risk that restrictions drafted in a contract will be void. Company secretaries therefore should be very careful not to lull their companies into a false sense of security in assuming that insignificant arrangements will not breach the rules.The OFT often produces very narrow markets indeed.The route of one particular bus could be regarded as a separate market and the market share of the bus companies involved on that route alone would be taken to determine dominance or general market share. It is beyond the scope of this short section to provide a major analysis of how to define markets.The OFT officials policing the Act include teams of economists and often clients need to engage their own experts in these matters.The OFT guidelines listed below include a set on market definition (OFT 403) and assessment of market power (OFT 415) to which reference should be made.
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Checklist – Appreciability •
Is it an agreement which affects trade between EU member states? If so EU notice on agreements of minor importance applies (5 per cent de minimis (10 per cent vertical agreements)).
•
Is it an agreement with no effects on trade between EU states? If so, consider UK competition law only.
•
Might EU trade be affected during the course of the agreement? If so, consider EU law now.
•
If only UK law applies, will the agreement have appreciable effects on competition in the UK? If not,the Competition Act does not apply.OFT say this is 25 per cent market share or more (40 per cent of abuse of market power cases).
•
Is the agreement a ‘small’ agreement (£20m turnover test – £50m for abuse cases)? If so,no fines/penalties can be levied but still may be void provisions, so do not ignore the Competition Act.
•
Even if agreement is not significant and/or is small,if there is price fixing the Competition Act will still apply, however small or local the arrangement.
Agreements The Prohibition Article 81 and the Chapter I prohibition of the UK Competition Act 1998 are virtually identical.They prohibit agreements between: •
undertakings
•
decisions by associations of undertakings
•
concerted practices which may affect trade within the UK, in the case of the UK rules,and between EU member states for the EU competition rules,and which have as their object or effect the prevention,restriction or distortion of competition within the UK/EU.
The UK prohibition applies to agreements which operate only in a part of the UK as well as over the whole of the UK. It does not have to be a substantial part of the UK. The UK law follows the EU rules.The courts are obliged to act to ensure there is no inconsistency between principles laid down by the Treaty and the European
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Court and decisions of the English courts.The court has to have regard to any relevant decision or statement of the European Commission.
What is an ‘agreement’? The law applies to ‘agreements’ which are anti-competitive.This covers written agreements and verbal agreements,but not unilateral conduct where companies act alone (although such conduct may breach the Chapter II prohibition – see Chapter four). It applies to verbal and non-binding gentlemen’s agreements too which is the status of most cartels, for example.They are all caught and banned. The OFT Competition Act Guideline 401 The Chapter I Prohibition paras 2.7 and 2.8 says: ‘Agreement has a wide meaning and covers agreements whether legally enforceable or not, written or oral; it includes so-called gentlemen’s agreements.There does not have to be a physical meeting of the parties for an agreement to be reached: an exchange of letters or telephone calls may suffice if a consensus is arrived at as to the action each party will, or will not, take.The fact that a party may have played only a limited part in the setting up of the agreement, or may not be fully committed to its implementation, or participated only under pressure from other parties does not mean that it is not party to the agreement (although the fact may be taken into account in deciding the level of any financial penalty).’
Case Study: Bayer AG v. Commission In Bayer AG v.Commission the European Court of First Instance in case T-41/96 had to examine whether Bayer had reached ‘agreements’ with its distributors. It decided to annul a 3 million euro fine as there was no such agreement.The Bayer Group is one of the main European chemical and pharmaceutical groups, represented in all Member States by national subsidiaries.It produces and markets a range of medicinal products for treating cardio-vascular disease under the trade name ‘Adalat’or ‘Adalate’.In most Member States,the price of medicinal products is fixed,directly or indirectly,by the competent national authorities.Between 1989 and 1993, the price of Adalat in France and Spain was much lower than that in the United Kingdom.Those price differences of about 40 per cent caused Spanish wholesalers (from 1989) and then French wholesalers (from 1991) to export that medicinal product in large quantities to the United Kingdom.
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That practice of parallel imports caused a loss of turnover of DEM 230 million for Bayer’s British subsidiary,the Commission says.The Bayer Group then unilaterally changed its supply policy so as to fulfil orders from Spanish and French wholesalers only at the level of their habitual needs.On 10 January 1996,following complaints by some of the wholesalers concerned, the Commission adopted a decision requiring Bayer to amend its practice, which the Commission held to be contrary to Community competition law, and fined it 3 million ecus. The Court of First Instance annulled that decision in November 2000, following an action brought by Bayer against it.The Court considered that the Commission had not proved that Bayer and its Spanish and French wholesalers made an agreement to limit parallel exports of Adalat to the United Kingdom.In the eyes of the Court, neither the conduct of the Bayer Group nor the attitudes of the wholesalers constituted elements of an agreement between undertakings. None of the documents submitted by the Commission contained evidence of an intention by Bayer to prohibit exports by wholesalers or evidence that it sought to obtain their agreement to its new supply policy designed to limit parallel exports.Nor had the Commission demonstrated that the wholesalers adhered to that policy,their reaction indicating,on the contrary,an attitude of opposition.The Commission had therefore not proved the existence of acquiescence by the wholesalers,express or implied, in the attitude adopted by the manufacturer. Finally, the Court of First Instance rejected the argument that the Commission may legitimately consider it sufficient, for the purposes of proving the existence of an agreement,to find that the parties have continued to maintain their commercial relations, and points out that the very concept of an agreement is based on a concurrence of wills between economic operators.A full judgement is on the web site: www.curia.eu.int
Undertakings It applies to agreements between ‘undertakings’which includes limited companies, sole traders and partnerships and other bodies, including state trading entities and certain charities carrying out commercial activities. Some group companies which are quite independent of each other may be caught too.
Prohibited agreements The legislation lists certain agreements which infringe the prohibition. Agreements which: •
‘directly or indirectly fix purchase or selling prices or any other trading conditions
•
limit or control production,markets,technical development or investment
•
share markets or sources of supply
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•
apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage
•
make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which,by their nature or according to commercial usage, have no connection with the subject of such contracts.’
The words above are in the Chapter I prohibition in the Competition Act 1998 and Article 81 of the Treaty of Rome.They are examples of what might breach the prohibition and the list should not be taken as exhaustive.
Areas to watch Pricing Price is the main means of competition.The following are prohibited: •
price fixing
•
resale price maintenance
•
recommended prices which are enforced by sanctions
•
discriminatory discounts
•
exchanging information about prices with competitors.
In their guideline 401 The Chapter I Prohibition para.3 the OFT gives examples of breaches of the Chapter I prohibition. In the pricing area it says in para. 3.6: ‘There are many ways in which prices can be fixed. It may involve fixing the components of a price, setting a minimum price below which prices are not to be reduced, establishing the amount or percentage by which prices are to be increased, or establishing a range outside which prices are not to move.There are other types of agreements which may have an effect on the prices charted.’ The guideline then considers those other types of agreement – such as those which affect prices indirectly – terms of guarantees, payments for additional services, credit terms and discounts and allowances granted.
Quantity restrictions Agreements to restrict quantities of goods to be produced or bought will infringe the prohibition. Restrictions on investment and technical development are also forbidden under this provision. Attempts to control markets are also against the law.
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Market sharing In the classic cartel competitors agree to keep out of each other’s markets.We keep out of plastics if you keep out of glue; or we keep out of the North West if you leave the South East to us.This breaches UK and EC competition law and can lead to heavy fines.The OFT’s view is that any ‘tenders submitted as a result of joint activities are likely to have an appreciable effect on competition’.In practice joint tendering arrangements should always be checked by competition lawyers and no long-term arrangements should be entered into.
Public procurement rules In the context of joint tendering it is sensible here also to mention that compliance with the EU public procurement rules will not necessarily ensure compliance with the Competition Act 1998 or EU competition law.Those rules require high value public contracts to be advertised throughout the EU and awarded in accordance with particular rules in a fair way. In 2000 the British Government was taken to the European Court for allowing ‘framework arrangements’ of up to five years in length which mean that such large contracts only need to be awarded every five years, which the EU argues breaches the public procurement directives. However at the date of writing that case has not yet been heard.
Joint buying and selling Joint purchasing and selling,whether traditionally arranged or through businessto-business (B2B) Internet web sites, also needs careful scrutiny under the competition rules. In fact some of the 900+ Internet B2B purchasing web sites which have been set up by groups of businesses have competition lawyers present at all meetings.The UK Office of Fair Trading held a seminar on e-commerce and competition law in autumn 2000 to present a report it had commissioned from Frontier Economics on this subject.It included much information about such joint purchasing arrangements and the Internet.In October 2000 the US Federal Trade Commission issued a Report on Competition Policy in the World of B2B Electronic Marketplaces, available at: www.ftc.gov. The EU guidance issued in 2000 on horizontal agreements contains very useful information in this field, particularly relating to joint purchasing. It is published at: europa.eu.int/comm/competition/antitrust/legislation/. In summer 2000 the EU cleared a joint venture setting up www.myaircraft.com.
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Convisint and B2B Three car makers who have formed Convisint have gone out of their way to ensure they do not aggregate their purchasing and are free to do business with other trade exchanges. Ford, a member with General Motors and Daimler-Chrysler, has put some steel buying through eSteel,a different venture.Even so the US Federal Trade Commission investigated, but has cleared them.About US$250bn is likely to be the value of purchases through the site. The US Justice Department is investigating whether a business-to-business Internet web site being designed by six meatpacking companies breaches US federal antitrust law.There are concerns that the participants in the $20 million e-commerce venture might try to control supply by jointly marketing their products and staying away from each other’s customers.There have been suggestions it might become the ‘OPEC of meat’.The six packers involved have combined annual sales of about $40 billion.The arrangement would provide a single place for buyers and sellers of meat and poultry products to connect with each other and allow faster product comparison and price negotiation, reducing paperwork and other duplication (www.ibpinc.com ).
Dissimilar conditions ‘Dissimilar’ conditions should not be applied to ‘equivalent transactions’.
Ties ‘Tying’clauses are prohibited.These require those entering into contracts to accept other obligations which have no connection with the contract.Sellers should not force unrelated products on purchasers.
Consequence of breaching the prohibition Restrictions in agreements which breach the prohibition will be void.This means they cannot be enforced in court. For example if A agrees to appoint B as its distributor but says B must not supply outside his territory nor resell other than in accordance with the approved price list, and B proceeds to do these things, A will lose if he sues B.The restrictions are void. However the agreement itself stands and B is still allowed to purchase products from A.
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Individual exemptions Businesses which want to enter into agreements which may infringe the law and which do not fall under any block exemptions (see below) have two alternatives: 1.
Remove the restrictions
2.
Notify the agreement to the OFT or European Commission either informally applying for guidance,or formally,asking for a formal decision.
In order to obtain an individual exemption the law in Article 81(3) or the Chapter I prohibition requires that there must be benefits flowing from the agreement and the restrictions are indispensable. The agreement must contribute to ‘improving production or distribution’ or ‘promoting technical or economic progress’in each case,‘while allowing consumers a fair share of the resulting benefit’. It must not impose on the businesses concerned restrictions which are not ‘indispensable to the attainment of those objectives’. Nor must the agreement ‘afford the businesses concerned the possibility of eliminating competition in respect of a substantial part of the products in question’. Once an agreement is notified it is immune from fines. In the UK a fee of £5,000 on notification and £13,000 for a decision is payable. Seven notifications have taken place to date.
Examples of notifications under the Competition Act 1.
Memorandum of Understanding on the supply of oil fuels in an emergency: Agreement between various oil companies and others about joint planning and processes with the aim of preserving supply of oil fuels The main elements of the planning, information and management system include: implementation of early warning systems and related contingency plans; reviewing the level, location and role of oil fuel stocks in the event of disruption; facilitating the movement of oil fuels to users, and, in particular, to defined essential users; controlling the delivery of oil fuels to customers in the event of disruption to supplies;and agreeing crisis management systems. The applicants have requested a decision from the Director General that the MoU does not infringe the Chapter I prohibition, or in the alternative, that they grant an individual exemption,and a decision from the Director General that the MoU does not infringe the Chapter II prohibition.
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BSkyB/ntl channel supply agreement The notified agreement provided for the distribution on ntl’s cable systems of certain of Sky’s television channels for approximately five years. It also provided for each party to offer to the other party for carriage on its platform, certain future programming and pay per view sports events/packages, and to co-operate to find technical solutions to facilitate the distribution on the other party’s platform of enhanced and interactive services falling within the mutual offer provisions.BSkyB and ntlI have jointly applied for a decision: i)
that the Chapter I prohibition is not infringed (either because the exclusion for vertical agreements is applicable,or because the agreement does not appreciably prevent,restrict or distort competition),or in the alternative that the Director General grant an exemption
ii)
that the entering into and performance of the agreement does not constitute conduct amounting to an abuse of a dominant position under the Chapter II prohibition.
Neither of these notifications has yet resulted in a decision by the OFT. The Public Register section of the web site of the OFT gives details (www.oft.gov.uk).
Proposed changes The European Commission has proposed to abolish its notification system and the UK has not seen many notifications because of the expense involved.
Exemptions There are certain regulations of the European Commission (which also provide exemption under the 1998 Act) for certain common types of exclusive agreement, even though such agreements might restrict competition. However, these exemptions can be rather limited in scope and no one should draft an agreement in those fields without having a copy of the regulation exemption to hand. If an agreement can be brought within one of these regulations then it is exempt from UK and EU competition law.It is not surprising that businesses try very hard indeed to ensure their agreements come within block exemptions.
Importance of block exemptions The so-called block exemption regulations of the Commission, some of which are described in chapter three,and others which have been issued in special areas such as motor vehicle distribution and the air transport sector are very important indeed.No UK competition lawyers would draft any contract in these categories without paying close regard to the regulations.
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Other exclusions The UK Act contains certain specific exclusions from the legislation.These are set out in schedules 1-4 and are: •
mergers and concentrations (not dealt with in this Report)
•
competition scrutiny under other enactments
•
planning obligations and other general exclusions
•
professional rules.
Vertical agreements Since 1 June 2000 a new regulation on vertical agreements (2790/1999) has applied at EU level.Agreements which come within its terms are exempt from UK and EU competition law. Under the Competition Act the equivalent exemption is a regulation exempting vertical agreements but in a broader way.
List of Guidance Notes and Legislation of the Office of Fair Trading 1.
The Major Provisions FINAL VERSION (OFT 400) A general guide to the Competition Act 1998,providing an overall summary of the Act’s provisions.
2.
The Chapter I Prohibition FINAL VERSION (OFT 401) The Chapter I prohibition covers agreements which may affect trade within the United Kingdom and which may prevent,restrict or distort competition.
3.
The Chapter II Prohibition FINAL VERSION (OFT 402) The Chapter II prohibition covers abusive behaviour by a dominant undertaking. This guideline sets up some of the circumstances in which behaviour will or may be regarded as ‘abusive’.
4.
Market Definition FINAL VERSION (OFT 403) Advice and information on how the OFT defines markets when investigating cases under the Act.
5.
Powers of investigation FINAL VERSION (OFT 404) An explanation of the Director General’s powers of investigation to determine if the Chapter I or Chapter II prohibitions have been infringed.
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Concurrent application to regulated industry FINAL VERSION (OFT 405) REVISED APRIL 2000 and The Competition Act 1998 (Concurrently) Regulations 2000 (SI 2000/260) An explanation of which industry sectors the Act enforced concurrently by the Director General of Fair Trading and a sector regulator. It explains the procedures involved and gives information on how the regulators work together.
7.
Transitional arrangements FINAL VERSION (OFT 406) Explains the transitional arrangements designed to allow businesses to modify agreements and practices to comply with the new competition legislation.
8.
Enforcement FINAL VERSION (OFT 407) An explanation of the Director General’s power to impose and enforce directions, interim measures and financial penalties.
9.
Trade associations, professional bodies and self-regulatory organisations FINAL VERSION (OFT 408) An explanation of the effects of the Chapter I and Chapter II prohibitions on the activities of trade associations,and the exclusion of the rules of certain professional bodies.
10. Form N for notifying agreements to the OFT 11. Assessment of individual agreements and conduct FINAL VERSION (OFT 414) Explains how the Director General assesses the economic impact of individual agreements, decisions or concerted practices under Chapter I and the conduct of undertakings which have dominant positions under Chapter II. 12. Assessment of market power FINAL VERSION (OFT 415) An explanation of how the Director General of Fair Trading assesses whether undertakings possess market power. 13. Exclusion for mergers and ancillary restrictions FINAL VERSION (OFT 416) Agreements and conduct that give rise to mergers are generally excluded from the provisions of the new Act,as are any restrictions which are directly related and necessary to the implementation of the merger (ancillary restraints).This guideline explains how this exclusion works in practice.
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14. The application of the Competition Act in the telecommunications sector FINAL VERSION (OFT 417) An OFTEL publication.This guideline sets out the approach that will be taken in applying and enforcing the new Act in the telecommunications sector. 15. Vertical agreements and restraints FINAL VERSION (OFT 419) This guideline explains how the Director General of Fair Trading expects the Competition Act 1998 to operate in relation to vertical agreements and restraints.In particular,it explains the application of the Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 to vertical agreements. 16. Land agreements FINAL VERSION (OFT 420) This guideline explains how the Director General of Fair Trading expects the Competition Act 1998 to operate in relation to agreements and conduct relating to land.In particular,it explains the application of the Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 to land agreements. 17. The application of the Competition Act in the water and sewerage sectors FINAL VERSION (OFT 422) An OFWAT publication.This guideline sets out the approach that will be taken in applying and enforcing the new Act in the water and sewerage sectors in England and Wales. 18. Guidance as to the appropriate amount of a penalty FINAL VERSION (OFT 423) 19. The application of the Competition Act to railway services DRAFT VERSION (OFT 430) An Office of the Rail Regulator publication.This guideline sets out the approach that will be taken in applying and enforcing the new Act in the railways sector. 20. Guidance notes on completing Form N FINAL VERSION (OFT 431) Assistance for people considering notifying an agreement or conduct. 21. The Competition Act 1998 (Director’s rules) Order 2000 (The Director General’s procedural rules now in the form of a Statutory Instrument) Statutory Instrument 2000 No. 293 These rules set out the procedures to be followed by persons making an application for a decision or guidance,and those to be followed by the Director General.
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22. Leniency, Complaints and Public Register – OFT views on when leniency will be shown to those who co-operate. 23. Competition Act 1998 (Determination of Turnover for Penalties) Order 2000 (SI 2000/309) 24. Competition Act 1998 (Land and Vertical Agreements) Exclusion Order 2000 (SI 2000 No. 310) 25. Weekly Gazette – weekly journal of OFT under Competition Act 1998 26. The Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000 SI 2000/262 27. Application to the Energy Sectors Draft OFT 428 June 2000
Further information The OFT guidance notes on the Chapter I prohibition are at www.oft.gov.uk under Guidance. The August 2000 report commissioned by the Office of Fair Trading from Frontier Economics on E-commerce and Competition law is available on the OFT web site www.oft.gov.uk under Reports. The US Federal Trade Commission October 2000 Staff Report: Entering the 21st Century – Competition Policy in the World of B2B Electronic Marketplaces is summarised at: www.ftc.gov/opa/2000/10/b2breport.htm from which page the FTC report can be accessed.
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Common contracts VERTICAL AGREEMENTS AGENCY AGREEMENTS R E S E A R C H A N D D E V E L O P M E N T, S P E C I A L I S A T I O N R E G U L AT I O N S A N D H O R I Z O N TA L A G R E E M E N T S SELLING A BUSINESS LAND AGREEMENTS PAT E N T A N D K N O W- H O W L I C E N C E S OTHER INTELLECTUAL PROPERTY AGREEMENTS F U RT H E R I N F O R M AT I O N
chapter
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Chapter 3: Common contracts This chapter examines common types of agreement and in particular the exemptions or regulations which apply to: •
Vertical agreements such as franchising,distribution,specialisation,beer supply and petrol solus type arrangements
•
Agency agreements
•
Research and development and specialisation agreements (and other ‘horizontal agreements’)
•
Land agreements
•
Patent and know-how licences
•
Other intellectual property agreements.
However,there are many other types of contract which arise in practice and some special EU regulations are not considered here. For example, there are separate EU regulations for motor vehicle distribution contracts and for the air transport sector and an EU notice on joint venture arrangements.
Vertical agreements Article 2 of regulation 2790/1999 and the UK exemption regulation for vertical agreements,The Competition Act 1998 (Land and Vertical Agreements Exclusion) order 2000 provides that the competition rules do not apply to agreements between two or more undertakings each of which ‘operates for the purposes of the agreement at a different level of the production or distribution chain’ where the agreement relates to the conditions under which the parties may purchase,sell or resell certain goods or services.These are known as vertical agreements.The exemption does not apply to agreements between competing businesses.
No UK exemption for minimum resale price maintenance Under the UK exemption order all such agreements are outside the UK law. The order was made under section 50 of the Competition Act 1998. However it does not apply to agreements which directly or indirectly have as their object or effect the restriction of a buyer’s ability to determine its sale price. Maximum resale price maintenance is allowed as are recommended prices.
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EU law Article 3 - 30 per cent test The EU exemption will only apply if the market share held by the supplier does not exceed 30 per cent of the relevant market on which it sells the contract goods or services.Where there is an exclusive supply obligation then the exemption only applies on condition that the market share held by the buyer does not exceed 30 per cent of the relevant market on which it buys the contract goods or services. Under the old regulation which will be replaced by this regulation there was no such 30 per cent test so some agreements previously exempted will not now be exempt.There is no such requirement under the UK exemption order which means that bigger businesses will be trying very hard to ensure their arrangement has no effect on trade between EU member states. However in practice this can be hard to show as even small or just potential effects are enough.The safest advice will be to follow the EU regulation and its tighter regime and consider this market share test.
What restrictions are not allowed under EU law? As seen above to fall within the UK exemption order there must be no minimum resale price maintenance.Other restrictions are allowed.The EU regulation is stricter, but has the same principle – all restrictions are allowed unless they are specifically banned. Article 4 of EU regulation 2790/1999 lists restrictions which are banned: a)
Price: any restriction on a buyer’s ability to determine its sale price is prohibited although recommended and maximum resale prices are allowed.Minimum or stipulated precise resale prices are banned.Even under the separate motor vehicle distribution exemption regulation (which continues separately) price restrictions are against the law.Price restrictions always breach the UK Competition Act 1998 too no matter how small or insignificant the agreement or arrangement.Nor must the recommended price become a ‘fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties’. Exactly the same wording appears in the UK exemption for vertical agreements as mentioned above.
b)
Territorial restrictions: restrictions on territories or customers are banned except in limited cases.It is permissible to restrict active marketing by a dealer into the supplier’s or another buyer’s exclusive territory where this does not limit sales by customers of the buyer.Also permitted are restrictions on sales to end users by a buyer operating at a wholesale level of trade, restrictions on sales to unauthorised distributors outside a selective distribution network and restrictions on a buyer’s ability to buy components supplied for the purposes of incorporation to
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customers who would use them to make the same type of goods as those produced by the supplier. The Guidelines on Vertical Restraints (13 October 2000 OJ C291/1 provide that all distributors must be free to market by way of a web site and the supplier cannot reserve that method of selling to themselves.It is regarded as ‘passive’selling rather than ‘active’ and the dealer must be allowed to engage in it, see para. 51 of the Guidelines). c)
Selective distribution restrictions: there must be no restriction on either active or passive sales to end users by members of a selective distribution system operating at a retail level of sale.
d)
Selective distribution – cross supplies:distributors within a selective distribution system at all levels must be free to make cross supplies to each other.
e)
Spare parts: there must be no restriction between a supplier of components and a buyer who incorporates those components, which limits the supplier to selling the components as spare parts to end-users or to repairers or other service providers not entrusted by the buyer with the repair or servicing of its goods.
f)
Non-compete obligations – five year rule:Article 5 prohibits noncompete obligations which last indefinitely or for more than five years. In practice many companies do want agreements which are indefinite, evergreen or longer than five years.There is no option under the regulation but to ensure the agreement only lasts for five years.The law before 1 June 2000 did not contain such a provision.There are exceptions where the supplier owns the premises from which the buyer trades;non-compete restrictions after a contract is over (there is a very limited exception again where the supplier lets premises to the buyer and the restriction relates to competing goods or services only, is indispensable to protect knowhow and does not last for more than a year after termination). In most cases once the contract is over the distributor must be free to compete; Article 5 also bans restrictions on selective distributors selling brands of competing suppliers.
Under the UK exemption order there is no requirement that an agreement be limited to five years in length,however most UK agreements are at risk of affecting trade abroad and thus compliance with the EU rules is the safest advice. Other restrictions Other restrictions than those mentioned above are exempted by the regulations but subject to strict conditions which were not in the old regulations which it replaces.There is now a serious problem for companies with a market share of
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over 30 per cent.They cannot benefit from the exemption in the regulation.The 30 per cent market share provision was not in the earlier regulation. If there is an exclusive supply obligation in the agreement the 30 per cent test also applies to the buyer. There are special provisions relating to agreements with members of an association, agreements between competing companies and cross-distribution agreements.
Motor vehicle distribution There is a separate regulation for motor vehicle distribution agreements which is not described here.On 15 November 2000 the European Commission adopted an ‘evaluation report on motor vehicle distribution and servicing under Regulation 1475/95’which is the regulation on motor vehicle distribution and servicing agreements.The report is an analysis of that exemption regulation.A hearing was due in February 2001 to consider comments on the report. The report comes to the conclusion that the block exemption has not achieved part of the aims stated by the Commission in 1995 when it renewed its permission to use selective distribution networks for the sale of motor cars. Consumers in particular do not seem to derive from this distribution system the fair share of the benefits of the creation of a European single market in 1993. Before the end of the year 2001, the Commission intends to publish proposals for the new motor vehicle distribution and servicing regime that will be applicable after Regulation 1475/95 expires on 30 September 2002.The proposals will take into account comments received from interested parties and views aired at the hearing.The new framework will be decided by the Commission in the first half of the year 2002 at the latest. The report,as well as details on the hearing,will be published on the Internet under: www.europa.eu.int/comm/competition/car_sector/
Agency agreements Commercial agency agreements rarely breach the competition rules.They are often not agreements between separate ‘undertakings’ so the rules do not apply.The agent simply finds customers for the principal who then makes a sale to the customer.The agent never owns the goods. Under EU law the Guidelines on Vertical Restraints (13 October 2000 OJ C291/1) para. 12-20 contain the relevant EU competition law in this field. It replaced an earlier 1962 notice on agency agreements of the Commission.The Commission
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says ‘in the case of genuine agency agreements, the obligations imposed on the agent as to the contracts negotiated and/or concluded on behalf of the principal do not fall within the scope of application of Article 81(1)’. If the agent does not bear any significant risk on the transaction then the EU rules will not apply.This is assessed on a case by case basis (para.16).There is a list of factors the Commission considers such as whether the agent takes the risk on the transaction, whether it is responsible for product liability etc. The greater risk with agency agreements in the EU is the EU agency directive 86/653 and in Great Britain the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3173) as amended.There are separate regulations in Northern Ireland. The directive and regulations give commercial agents marketing goods protected rights, in particular to an indemnity or compensation payment when the agency agreement is terminated in many cases. Often the agent claims two years’ commission as compensation.
Some cases on agency claims in the UK King v.Tunnock, 12.3.00,TLR 12.5.00 Roy v. Pearlman 10 March 1999,TLR 13.5.99 Duffen v. FRA [1999] TrLR 342 Ingmar GB Ltd v.Eaton Leonard Technologies Inc (ECJ 9.11.00 Times Law Reports 16.11.00, Case No. C-381/98) Duncan Moore v. Piretta PTA Ltd [1999] 1 All ER 174 AMB Imballaggi Plastici SRL v.Pacflex Limited [1999] Tr L R 153 (CA) (Times Law Reports 8 July 1999) Tamarind Int Ltd & Ors v.Eastern Natural Gas (Retail) Ltd & Eastern Energy Ltd (12 June 2000, High Court)
Research and development, specialisation regulations and horizontal agreements The European Commission has separate block exemption regulations under the competition rules (Article 81) for research and development and specialisation agreements as well as guidelines on horizontal agreements.Horizontal co-operation agreements are potentially distortive of competition and are liable to fall under EC competition rules (Article 81 of the Treaty). Guidance for the assessment of horizontal co-operation is currently provided by two ‘block exemption’Regulations (on research and development (R&D) agreements and specialisation agreements)
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and two interpretative Notices (dealing with particular issues such as co-operative joint ventures). As the old block exemption Regulations expired on 31 December 2000,and as the old Notices needed revision,the Commission,over the last three years,carried out a wide-ranging reflection on the future assessment of horizontal co-operation. As a result, the Commission adopted: •
A block exemption Regulation 2659/2000 the application of Article 81(3) of the Treaty to categories of research and development (R&D) agreements (published OJ 5.12.00 L304/7 – see www.europa.eu.int/eurlex under Official Journal for 5 December)
•
A block exemption Regulation 2658/2000 on the application of Article 81(3) of the Treaty to categories of specialisation agreements (published OJ 5.12.00 L304/3)
•
Guidelines on the applicability of Article 81 to horizontal co-operation agreements (at the date of writing not yet published in the Official Journal). These guidelines cover agreements on R&D, production, marketing, purchasing, as well as standardisation and environmental agreements.
The Commission says that the new rules embody a shift from the formalistic regulatory approach underlying the current legislation, towards a more economic approach in the assessment of horizontal co-operation agreements. The basic aim of this new approach is to allow competitor collaboration where it contributes to economic welfare without creating a risk for competition. The new rules came into effect on 1 January 2001.Existing agreements will continue to be covered by the old R&D and specialisation block exemption Regulations until 30 June 2001.
Background The review of the competition rules applicable to horizontal co-operation agreements started in late 1997 with a wide-ranging consultation of European companies. It showed that industry regards the existing block exemption Regulations as too focused on legal clauses,and that there is a need for clearer guidance on the assessment of those categories of co-operation which are not covered by any block exemption. The new documents thus give better guidance to market participants.They replace the fragmented and partly outdated notices and regulations in this area.The approach is very similar to that of the new Regulation setting out the rules for the distribution sector (‘vertical co-operation agreements’) which the Commission adopted on 22 December 1999.
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The two block exemption Regulations replace the old Regulations on Specialisation (Commission Regulation (EEC) No. 417/85) and R&D (Commission Regulation (EEC) No. 418/85). In comparison to the existing Regulations the new texts are designed to be more user-friendly, with greater clarity and an increased scope of application.The new block exemptions replace the existing system of specifically exempted ‘white list’clauses by a general exemption of all conditions under which undertakings pursue R&D and specialisation agreements.This move away from a clause-based approach gives greater contractual freedom to the parties of such agreements and removes the ‘strait-jacket’ imposed by the old Regulations. In practice few competition lawyers were ever able to bring R&D agreements under regulation 418/85 (it almost became a standing joke amongst them that the regulation was singularly inapplicable to most deals). The market share threshold for exemption of all parties to an agreement combined is set at 20 per cent for specialisation agreements, and at 25 per cent for R&D agreements. Beyond these market shares, R&D or specialisation agreements will not automatically be prohibited but will have to be assessed individually. However,‘hardcore’ restrictions (price-fixing, output limitation or allocation of markets or customers) will generally remain prohibited irrespective of the parties’ market power. The guidelines complement the block exemption Regulations.They are applicable to R&D and production agreements not covered by the block exemptions as well as to certain other types of competitor collaboration (e.g. joint purchasing, joint commercialisation).The guidelines describe the general approach which should be followed when assessing horizontal co-operation agreements and set out a common analytical framework.This helps companies to assess with greater certainty whether or not an agreement is restrictive of competition and, if so, whether it would qualify for an exemption.
R&D Exemption – details The R&D reg 2659/2000 briefly provides: •
Article 1: Article 81(1) shall not apply to agreements between two or more undertakings which relate to: a)
Joint R&D of products or processes and joint exploitation of the results of the R&D
b)
Joint exploitation of the results of R&D of products or processes jointly carried out under a prior agreement between the same parties
c)
Joint R&D of products or processes which exclude joint exploitation of the results.
The regulation does not therefore apply where parties independently carry out their R&D and then want to jointly exploit the results.
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Article 3: All parties have to have access to the results of the joint R&D for further research or exploitation but academic bodies can be restricted from exploitation if they are not normally active in exploitation of results (most UK universities are now normally so active so competition lawyers are going to have to ask in each case whether they are, or are not, and perhaps obtain warranties to this effect).
If there is no joint exploitation then each party must be free to exploit the results. If the parties are not competitors the independent exploitation can be limited to certain fields of use. •
Article 4: Read the provisions about market share carefully.If the parties do not compete then the exemption applies for the duration of the R&D and if the results are jointly exploited it continues for seven years from the products first being put on the market in the EU.At the end of these periods the restrictions can continue for as long as the parties’combined market shares are 25% or less of the relevant market for the contract products.If the parties are competitors then the exemption only applies at all if the combined market shares do not exceed 25% of the market for the products being improved or replaced by the contract parties.
•
Banned clauses – Article 5: Article 5 contains an important list of ten provisions, the presence of which mean the exemption does not apply.These can be summarised as follows but delegates should read the regulation itself which provides more detail: a)
restriction on carrying out unconnected research
b)
restrictions on challenging validity of the IP rights
c)
limitation of output or sales
d)
fixing of prices when selling contract product to third parties
e)
restriction on customers who can be served after seven years after the contract products are first put on the market in the EU (no customer restrictions after seven years)
f)
prohibition on making passive sales of contract products in territories reserved for other parties (no passive selling restrictions)
g)
prohibition on active selling in other parties’territories after seven years after the products first put on the EU market (no active selling restrictions after seven years)
h)
requirement not to grant licences to third parties to make the products where exploitation by at least one party of the results of joint R&D is not provided for or does not take place (if no one is exploiting then they must be free to license third parties)
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i)
refusal to meet demand from users or resellers who would market the products in other EU states
j)
measures making it harder for users or resellers parallel importing.
The Guidelines The Horizontal agreements guidelines complement the block exemption Regulations. They are applicable to R&D and production agreements not covered by the block exemptions,as well as to certain other types of competitor collaboration (e.g.joint purchasing, joint commercialisation).Those IP and e-commerce lawyers currently grappling with B2B and B2C purchasing web sites for example, which involve all manner of collaborative purchasing and potentially infringing arrangements, will find the guidelines very helpful. The guidelines describe the general approach which should be followed when assessing horizontal co-operation agreements and set out a common analytical framework.This helps companies to assess with greater certainty whether or not an agreement is restrictive of competition and,if so,whether it would qualify for an exemption.
Selling a business Most business sale agreements include restrictions on individual sellers (or corporate sellers) as to competition after the sale. In the huge number of guidance notes the OFT has issued there lurks two short paragraphs on business sale agreement restrictions in the guidance notes on Mergers and Ancillary Restraints. OFT 416: Para 4.10: Non-competition clauses often arise in the context of the acquisition by one undertaking of all or part of another undertaking.Such clauses, if properly limited, are generally accepted as essential if the purchaser is to receive the full benefit of any goodwill and/or know-how acquired with any tangible assets. Para 4.11: The terms of the clause must not, however, exceed what is necessary to attain that objective.The DG will consider the duration of the clause, its geographical coverage, and the products affected.In general terms, a five-year period (currently under a review and consultation by the EC) will normally be acceptable where both goodwill and know-how have been acquired, and a period of two years where only goodwill is involved.Longer periods may be acceptable depending on individual circumstances. Any restriction must relate only to the goods and services of the acquired business and to the area in which the goods and services were established under the previous owner.
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This is what EU case law says and is not dissimilar to common law on restraint of trade.
Checklist for acquisitions On any acquisition consider the following competition issues: 1.
Would it amount to a qualifying merger under the Fair Trading Act 1973 and require prior clearance from the OFT?
2.
On due diligence are any of the agreements or arrangements in breach of the competition rules? (Remember to consider transitional provisions under the RTPA as well for older agreements.) What warranties about competition law compliance will be required?
3.
On the sale agreement are the non-competition restrictions proposed too long or too wide under EU competition law, if relevant, and UK competition law?
4.
Are any ancillary agreements such as ongoing distribution contracts or licensing agreements in breach of the Chapter I prohibition.
Land agreements Added to the list of the typical contracts requiring competition law scrutiny should now be the ‘land agreement’.The old Restrictive Trade Practices Act 1976 (‘RTPA’) contained some wide exclusions for land contracts, bolstered by the leading Ravenseft Properties v.DGFT [1978] QB 52 decision much used by property and intellectual property lawyers alike to avoid the previous legislation.The new Act exempts ‘land agreements’,but this will not apply to every property transaction, hence the need for consideration.
Transitional provisions Before examining the application of the new Act to land agreements,the transitional provisions of the Act in general must first be considered. The OFT Guideline Transitional Arrangements (OFT 406 which is also on the OFT web site at www.oft.gov.uk) and the Act itself deal with this.There is a one-year transitional period for agreements which were made before the enactment date of the Competition Act 1998 (assuming they complied with the old law,but not the new). However agreements which should have been registered under the RTPA, but were not, must comply from 1 March 2000.
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Assuming the agreement did comply with the previous legislation and will not comply with the new law,the parties should now consider how to adapt it before the one-year transitional period expires on 1 March 2001. It is possible to apply for an extension to the transitional period but these will not often be granted.The booklet on transitional arrangements runs to 19 pages so it needs to be considered in detail. It is only briefly summarised here. Section 50 of the Competition Act 1998 allows the Secretary of State by order to exclude land agreements from the ambit of the Act.This has been done by a statutory instrument The Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 (SI 2000/310, on the Internet at: www.hmso.gov.uk/si/si2000/ 20000310.htm). The OFT has issued detailed Guidelines in relation – Competition Act 1998:Land Agreements (OFT 420).These are on the Internet at: www.oft.gov.uk/html/comp-act/technical_guidelines/oft420.html The most important question is what is a land agreement? Conveyancers and other property managers only need to ensure their agreement falls within this category and then the Competition Act will not apply. Regulation 2 defines it as: ‘An agreement between undertakings which creates, alters, transfers or terminates an interest in land, or an agreement to enter into such an agreement, together with any obligation and restriction to which Article 6 applies; and to the extent that an agreement is a vertical agreement it is not a land agreement.’ Vertical agreements are separately exempt (see above). The following are land agreements: •
Transfers of freeholds
•
Leases
•
Assignments of leasehold interests
•
Easements
•
Licences
•
In Scotland,interests under a lease,other heritable rights in or over land including heritable securities
•
Agreements to enter into land agreements.
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The following are not excluded: •
Agreement between landowners in a particular area to fix levels of rent to be charged to tenants
•
Agreement between tenants as to the nature of goods they will each sell in a particular area.
These are not land agreements as they do not create, alter, transfer or terminate an interest in land.The following obligations and restrictions would be exempt: •
•
Covenants I commercial property agreements relating to: –
payment of rent
–
service charges
–
user clauses
–
alienation
Restrictions on a tenant relating to: –
alterations
–
repairs
–
applications for planning permission
–
the presence of shop signs
–
advertisements
–
hours of use of the premises.
For the exemption to apply the obligation or restriction such as those listed above must either be accepted in, or for the benefit of, the business’ capacity as holder of an interest in land.The Act applies to ‘undertakings’.This has a broad meaning. It covers companies,sole traders,partnerships,selling arms of charities,state bodies engaged in trade (e.g.NHS hospitals rent out beds to the private sector,local councils let accommodation to council tenants).‘Undertaking’was examined in Consiglio Nazionale degli Spendiz Doganali v.Commission (Court of First Instance, case T-513/93) (www.curia.eu.int/en/cp/aff/cp0023en.htm.This also gives a link to the 18.6.98 judgment in Commission v. Italian Republic where the court held that Italian laws in this area breached EU law.The judgment is on the Internet searching the T-513/93 case number on the www.curia.eu.int site under judgments but is not in English.) The OFT expects to look at businesses to ascertain whether their land agreement is entered into in their capacity as holder of the interest in land or because of other trading interests.
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Examples A widget and blodgets manufacturer, in an OFT example, sell their only blodgets factory to another business and accept a restriction not to open another blodgets factory and not to produce blodgets from the widgets factory.This would not come within the land exemption (it may come within the exemption for mergers and fall within the Fair Trading Act 1973 however). A restriction in a lease requiring the tenant of a petrol station to buy the petrol only from the landlord is not within this exemption (it may however be an exempt vertical agreement). An obligation in a lease for a tenant to insure the leased property with the landlord who is an insurance company would not come within the exemption.The guidelines go on to say,though,that an obligation to insure a property ‘through an insurance company landlord’ would be exempt as this would then relate solely to interests in land.The writers finds the difference too subtle to understand. In a parade of shops restrictions on the goods to be sold in each premises and on the quality of goods would be exempt, but restrictions on the conditions on which the trade is carried out, such as those which have the effect of fixing minimum resale prices, or the quantity of goods sold, or suppliers or sources of goods sold or services provided on or from the premises, would not be exempt. Telling traders in a shopping centre that they must all buy their light bulbs from one trader who also has premises there would be caught. Reciprocal restrictions are acceptable too,such as a tenant,to use an OFT example again, agreeing to sell only wet fish, agreed on the basis that no other tenant will sell wet fish.This is exempt whether it is mutually enforceable or the landlord enforces it.
Land? The exercise of checking property agreements under the Act is not simple.The OFT make clear that just because provisions in a contract make it a land agreement, does not mean that it is outside the Act.There may be other parts of it which are not a land agreement.The legislation refers to an agreement being exempt ‘to the extent that’it is a land agreement. Agreements transferring land may also have clauses about financing in them, for example.
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Where the land exemption does not apply Vertical agreements Vertical agreements are also exempt from the Competition Act by the same exclusion order and there is a separate guidance note relating to those (Competition Act 1998:Vertical Agreements and Restraints OFT 419 see above). In practice if the manager or their lawyer finds their contract is not a ‘land agreement’ they would then turn to ascertain whether it could come within the exemption for vertical agreements (those at different levels of the supply chain). Parts of an agreement can benefit from both the vertical agreements and land agreements exemptions. Beer tie and petrol solus ties are examples of this. No appreciable effect on competition ‘small agreements’ The prohibition on anti-competitive agreements in the Act only applies where the agreement has an appreciable effect on competition law (which the OFT suggest means a market share of 25 per cent or more, except where there is price fixing or market sharing which is always banned no matter how small the arrangement). Where an agreement falls within a statutory definition of ‘small’it may be exempt from penalties (fines) – this does not of course affect its validity or otherwise under the Act.The regulation The Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000 (SI 2000/262) sets out the detailed rules and is considered in Chapter I. These rules state that a ‘small agreement’ is one where the joint turnover of all the undertakings involved in the agreement is not over £20m. It also provides the same immunity from the abuse of market power provisions of the Act (Chapter II, the Article 82 (ex 86) equivalent under EU competition law) for ‘conduct of minor significance’for which the turnover figure is £50 million. Notifying There is a procedure to notify agreements on Form N, also on the OFT web site. The OFT has issued Guidance Notes on Completing Form N (OFT 431) and reference should also be made to The Competition Act 1998 (Director’s rules) Order 2000 (SI 2000/293). However, the initial fee is £5,000 so it will only be worthwhile for larger notifications.At the date of writing only one notification had been made. Details are displayed on the OFT web site.
Withdrawal of exemption The OFT has drawn up a very broad exclusion for land agreements to give businesses certainty. However they also reserve a power, in consequence, to withdraw the benefit of the exclusion on notice to the parties.
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The Chapter II Prohibition Chapter II of the Competition Act prohibits abuses of a dominant position.The land agreements order contains no exclusion for abuse of market power. Reference should be made to the OFT Guidance notes on Market Definition (OFT 403), The Chapter II Prohibition (OFT 402) and Assessment of Market Power (OFT 415) and Assessment of Individual Agreements and Conduct (OFT 414). In the land context the land guidance notes say the OFT will look at the bargaining power of tenants and the possibility of new entry to the market,such by converting other premises or building new premises to act as a substitute.The OFT’s base line test is whether a business has 40 per cent of the relevant market. Markets can be any part of the UK, however small, as long as they are a separate local market. Those who own ports, bus stations, utility distribution networks and telecommunications networks will control ‘essential facilities’ and will normally be assumed to be dominant.There is of course nothing wrong with being dominant. It often means a company has done well and customers have benefited. It is in abusing that position that a breach of the Act may occur. Examples – abuse The OFT in their guidance notes on Land Agreements give examples of abuse as: •
Charging excessive rents above market level
•
Discrimination between tenants
•
Charging predatory rents
•
Vertical restrictions that tie or otherwise affect the buying or selling of goods and services by occupants of the land in question (e.g. by fixing resale prices) or limiting access to an essential facility.
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Patent and know-how licences Patent and know-how licences should normally be drafted to comply with the EU regulation on technology licensing 240/96. This regulation provides an exemption from Article 81 and also the Chapter I prohibition in the Competition Act.It provides that pure patent licensing or know-how licensing agreements and mixed patent and know-how licensing agreements, including those agreements containing ancillary provisions relating to intellectual property rights other than patents,to which only two undertakings are party and which include one or more of the following obligations are exempt: 1.
An obligation on the licensor not to license other undertakings to exploit the licensed technology in the licensed territory
2.
An obligation on the licensor not to exploit the licensed technology in the licensed territory themselves
3.
An obligation on the licensee not to exploit the licensed technology in the territory of the licensor within the common market
4.
An obligation on the licensee not to manufacture or use the licensed product, or use the licensed process, in territories within the common market which are licensed to other licensees
5.
An obligation on the licensee not to pursue an active policy of putting the licensed product on the market in the territories within the common market which are licensed to other licensees, and in particular not to engage in advertising specifically aimed at those territories or to establish any branch or maintain a distribution depot there
6.
An obligation on the licensee not to put the licensed product on the market in the territories licensed to other licensees within the common market in response to unsolicited orders
7.
An obligation on the licensee to use only the licensor’s trademark or get up to distinguish the licensed product during the term of the agreement,provided that the licensee is not prevented from identifying himself as the manufacturer of the licensed products
8.
An obligation on the licensee to limit his production of the licensed product to the quantities he requires in manufacturing his own products and to sell the licensed product only as an integral part of or a replacement part for his own products or otherwise in connection with the sale of his own products, provided that such quantities are freely determined by the licensee.
However there are fixed periods depending on whether patents or know-how are licensed during which these restrictions are permitted and any period over
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those limits renders the exemption inapplicable and all restrictions in the agreement then become void.
Permitted provisions The following provisions are not restrictive of competition and would be allowed in any intellectual property licence agreement.They are taken from article 2 of the regulation. 1.
An obligation on the licensee not to divulge the know-how communicated by the licensor; the licensee may be held to this obligation after the agreement has expired
2.
An obligation on the licensee not to grant sublicences or assign the licence
3.
An obligation on the licensee not to exploit the licensed know-how or patents after termination of the agreement in so far and as long as the know-how is still secret or the patents are still in force
4.
An obligation on the licensee to grant to the licensor a licence in respect of his own improvements to, or his new applications of, the licensed technology, provided:
5.
6.
a)
in the case of severable improvements,such a licence is not exclusive, so that the licensee is free to use his own improvements or to license them to third parties, in so far as that does not involve disclosure of the know-how communicated by the licensor that is still secret
b)
the licensor undertakes to grant an exclusive or non-exclusive licence of his own improvements to the licensee
An obligation on the licensee to observe minimum quality specifications, including technical specifications, for the licensed product or to procure goods or services from the licensor or from an undertaking designated by the licensor,in so far as these quality specifications,products or services are necessary for: a)
a technically proper exploitation of the licensed technology; or
b)
ensuring that the product of the licensee conforms to the minimum quality specifications that are applicable to the licensor and other licensees; and to allow the licensor to carry out related checks
Obligations: a)
to inform the licensor of misappropriation of the know-how or of infringements of the licensed patents; or
b)
to take or to assist the licensor in taking legal action against such misappropriation or infringements
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An obligation on the licensee to continue paying the royalties: a)
until the end of the agreement in the amounts,for the periods and according to the methods freely determined by the parties, in the event of the know-how becoming publicly known other than by action of the licensor, without prejudice to the payment of any additional damages in the event of the know-how becoming publicly known by the action of the licensee in breach of the agreement
b)
over a period going beyond the duration of the licensed patents, in order to facilitate payment
8.
An obligation on the licensee to restrict his exploitation of the licensed technology to one or more technical fields of application covered by the licensed technology or to one or more product markets
9.
An obligation on the licensee to pay a minimum royalty or to produce a minimum quantity of the licensed product or to carry out a minimum number of operations exploiting the licensed technology
10. An obligation on the licensor to grant the licensee any more favourable terms that the licensor may grant to another undertaking after the agreement is entered into 11. An obligation on the licensee to mark the licensed product with an indication of the licensor’s name or of the licensed patent 12. An obligation on the licensee not to use the licensor’s technology to construct facilities for third parties;this is without prejudice to the right of the licensee to increase the capacity of his facilities or to set up additional facilities for his own use on normal commercial terms,including the payment of additional royalties 13. An obligation on the licensee to supply only a limited quantity of the licensed product to a particular customer,where the licence was granted so that the customer might have a second source of supply inside the licensed territory; this provision shall also apply where the customer is the licensee, and the licence which was granted in order to provide a second source of supply provides that the customer is himself to manufacture the licensed products or to have them manufactured by a subcontractor 14. A reservation by the licensor of the right to exercise the rights conferred by a patent to oppose the exploitation of the technology by the licensee outside the licensed territory
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15. A reservation by the licensor of the right to terminate the agreement if the licensee contests the secret or substantial nature of the licensed know-how or challenges the validity of licensed patents within the common market belonging to the licensor or undertakings connected with him 16. A reservation by the licensor of the right to terminate the licence agreement of a patent if the licensee raises the claim that such a patent is not necessary 17. An obligation on the licensee to use his best endeavours to manufacture and market the licensed product 18. A reservation by the licensor of the right to terminate the exclusivity granted to the licensee and to stop licensing improvements to him when the licensee enters into competition within the common market with the licensor,with undertakings connected with the licensor or with other undertakings in respect of research and development, production, use or distribution of competing products, and to require the licensee to prove that the licensed know-how is not being used for the production of products and the provision of services other than those licensed. Prohibited provisions Article 3 lists provisions which breach EU competition law. If any of these are included all the restrictions in the licence agreement including those allowed under articles 1 and 2 describe above, become void: 1.
One party is restricted in the determination of prices, components of prices or discounts for the licensed products
2.
One party is restricted from competing within the common market with the other party, with undertakings connected with the other party or with other undertakings in respect of research and development, production, use or distribution of competing products without prejudice to the provisions of Article 2 (1) (17) and (18)
3.
One or both of the parties are required without any objectively justified reason: a)
to refuse to meet orders from users or resellers in their respective territories who would market products in other territories within the common market
b)
to make it difficult for users or resellers to obtain the products from other resellers within the common market, and in particular to exercise intellectual property rights or take measures so as to prevent users or resellers from obtaining outside, or from putting
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on the market in the licensed territory,products which have been lawfully put on the market within the common market by the licensor or with their consent; or do so as a result of a concerted practice between them 4.
The parties were already competing manufacturers before the grant of the licence and one of them is restricted,within the same technical field of use or within the same product market, as to the customers he may serve, in particular by being prohibited from supplying certain classes of user,employing certain forms of distribution or,with the aim of sharing customers, using certain types of packaging for the products, save as provided in Article 1 (1) (7) and Article 2 (1) (13)
5.
The quantity of the licensed products one party may manufacture or sell or the number of operations exploiting the licensed technology he may carry out are subject to limitations, save as provided in Article (1) (8) and Article 2 (1) (13)
6.
The licensee is obliged to assign in whole or in part to the licensor rights to improvements to or new applications of the licensed technology
7.
The licensor is required, albeit in separate agreements or through automatic prolongation of the initial duration of the agreement by the inclusion of any new improvements,for a period exceeding that referred to in Article 1 (2) and (3) not to license other undertakings to exploit the licensed technology in the licensed territory, or a party is required for a period exceeding that referred to in Article 1 (2) and (3) or Article 1 (4) not to exploit the licensed technology in the territory of the other party or of other licensees.
The Commission has the right to remove the application of the regulation where a market share of 40 per cent is exceeded,but at the date of writing appears never to have done so.
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Other intellectual property agreements The EU exemption regulation applies only to patent and know-how licences. If they contain ancillary licences of other rights such as copyright and trade marks they may be exempt too but if the agreement is a straight software copyright licence,for example,the exemption does not apply.In that case common restrictions such as exclusive grant of a copyright licence may breach Article 81 or the Chapter I prohibition. At the date of writing Guidelines of the OFT on intellectual property (IP) are awaited but are unlikely to emerge for some time. Software distribution agreements may, where the licensee does not copy and does not require a licence, be exempt by the vertical agreements regulation of the EU 2790/99 (see Guidelines on Vertical Restraints para.40).However as soon as the licensee adds value,alters the product or makes copies even that regulation will not apply.The OFT Guidelines on Vertical Agreements and Restraints (OFT 419) and the regulations which those guidelines explain allow under the UK exemption order an exemption for some IP licensing but only where part of a vertical agreement.In para.2.9 of the guidelines the OFT say: ‘The definition of a vertical agreement in the Exclusion Order refers to certain provisions relating to the assignment to, or use by, the buyer of intellectual property rights.Where such provisions are included, however, they will fall within the definition of a vertical agreement and may therefore benefit from the exclusion. There is no requirement that an agreement which otherwise falls within the definition of a vertical agreement as described above must contain such provisions for it to fall within the definition of a vertical agreement. In addition to being part of a vertical agreement, there are three additional elements to the definition of a vertical agreement with which provisions relating to intellectual property rights must comply in order to benefit from the exclusion.They must: •
Relate to the assignment to the buyer or use by the buyer of intellectual property rights
•
Not constitute the primary object of the agreement
•
Be directly related to the use, sale or resale of the goods or services by the buyer or its customers.’
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Further information The Regulation on the application of Article 81(3) of the Treaty of categories of vertical agreements and concerted practices,22 December 1999,No.2790/1999 was published in the European Commission’s official journal 29.12.99 L336/21 and can be bought from the stationery office.It is also on the competition directorate part of the Commission’s web site at:www.europa.eu.int from which the October 2000 guidelines on vertical agreements can also be accessed. The new R&D and specialisation and other block exemptions are on the Competition DG’s web site at: www.europa.eu.int/comm/competition/antitrust/legislation/ A book on EU agency law and in particular compensation for agents is ‘Commercial Agents Agreements: Law and Practice’ by Susan Singleton (Butterworths) 1998 The Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 (SI 2000/310, is on the Internet at: www.hmso.gov.uk/si/si2000/20000310.htm). The OFT has issued detailed Guidelines in relation to Competition Act 1998:Land Agreements (OFT 420).These are on the Internet at: www.oft.gov.uk/html/comp-act/technical_guidelines/oft420.html Motor vehicle distribution regulation – the report of November 2000 on the EU competition rules and the exemption existing for this sector is at: www.europa.eu.int/comm/competition/car_sector/
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Abuse of market power INTRODUCTION DOMINANT POSITION THE RELEVANT MARKET ABUSE OF A DOMINANT POSITION CONCLUSION F U RT H E R I N F O R M AT I O N
chapter
4
CHAPTER
4:
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OF
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POWER
Chapter 4: Abuse of market power The second limb of competition law prohibits abuse of a dominant position. It provides that ‘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 United Kingdom (in the case of the UK law) or for EU law in Article 82 where it affects trade between EU member states.Again in the UK the law is contained in the Competition Act 1998 and in the EU, the Treaty of Rome. In practice companies who are on the receiving end of a refusal to supply,unfair terms, predatory pricing or the like may find these provisions useful either in correspondence with the errant supplier or through making a complaint to competition authorities or even through suing for damages for breach of the legislation in the national courts. On the other side, dominant companies need to know they enjoy such a strong market position and take steps to ensure they do not act abusively.Sensible measures such as telling staff not to make arbitrary decisions,to try to treat like cases alike, to document reasons for refusals to supply, e.g. where a customer is not paying on time, should ensure the risks of breaching these provisions are lessened.
Introduction Companies enjoying a strong market position need to exercise particular caution to ensure that they do not abuse their dominant position contrary to the Chapter II prohibition and Article 82 of the Treaty of Rome.This chapter gives guidelines for use in determining whether or not a company enjoys a dominant position and goes on to describe the types of activity which amount to an abuse of that position. The legislation provides that any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it (in the case of Article 82) and under the 1998 Act in the UK or a part of it, shall be prohibited. Under the EU rules the prohibition applies where it may affect trade between Member States. Under the 1998 Act effects must be felt in the UK.
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Such abuse may, in particular, consist in: •
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, thereby placing them at a competitive disadvantage
•
making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which,by their nature or according to commercial usage, have no connection with the subject of such contracts.
Achieving a position of dominance in a particular market is the aim of most companies and there is no prohibition on attaining such market strength. Competition law simply requires that companies in such a position do not overstep the bounds of acceptable conduct by engaging in such activities as predatory pricing, unfair refusals to supply companies with products,tying the purchase of products to the purchase of other unrelated products or imposing unfair prices. As the prohibition only applies where a company is in a dominant position, all companies should first ascertain whether they hold a dominant position in the relevant market and keep this under review as the company expands and grows. If there is no dominance then what follows in this chapter is irrelevant, except in making accusations of abuse against dominant competitors.
Dominant position There is no definition of a dominant position in the Competition Act 1998 nor in the Treaty of Rome, but the concept of dominance has been examined in a number of EC cases.In Hoffman La-Roche v.Commission (Case C-85/76,[1979] ECR 461, [1979] 3 CMLR 211), a decision of the European Court of Justice in February 1979, it was stated that a dominant position relates to ‘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, its customers and ultimately of the consumers’.This is the legal test.It is also referred to by the OFT in their Guidelines on the Chapter II prohibition. The easiest test is to determine the market share of the company.Companies whose market share exceeds 40 per cent of a particular market will usually be regarded by the Commission and the OFT as dominant. Even companies with shares of
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between 20-40 per cent may be at risk,certainly under EU law.High market shares on their own will be sufficient to establish dominance, particularly where they are of the order of 70 per cent.Where a company has a market share of that order the onus will be on that company to prove it is not dominant. Shares of under that figure, but over 20-30 per cent, are likely to indicate dominance, but other factors need to be taken into consideration too.The following questions can usefully be asked in assessing dominance: •
Is the market share of the company in the relevant market over 40 per cent? This usually indicates dominance.
•
Can the company largely act without having to take much regard of its competitors in setting its prices or terms and conditions?
•
What are the market shares of competitors? A company with a market share of 20 per cent could be dominant where competitors all have a very small market share.
•
Is it difficult for companies to enter this market, i.e. are there barriers to entry (such as technology needed to operate,economies of scale which a new entrant may not enjoy, or a certain size of enterprise needed)?
The relevant market In determining the market shares of potentially dominant companies the question of the relevant product and geographical markets needs to be considered.Obviously, the broader the market definition,the smaller the share of the company concerned and the less likely that it will be held to enjoy a dominant position which it has abused.Companies and their advisers thus seek to offer to the Commission as broad a market definition as possible, by presenting the Commission with evidence of other products with which they allege the relevant products compete and which are regarded by consumers as substitutes. Example – United Brands In United Brands (Case C-27/76,[1978] ECR 207,[1978] 1 CMLR 429) in February 1978,the European Court of Justice had to consider what was the relevant market where the products concerned were bananas.United Brands maintained that there was a market for fresh fruit of which bananas were a part, rather than a separate banana market.The court considered cross-elasticity of demand between alternative products and found that there was separate demand for bananas apart from the demand for other fresh fruit. Bananas had special characteristics, such as their suitability for the young and the sick, which was not the case for other fruit.
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Increasingly the Commission is adopting more sophisticated analyses of the relevant product market, looking to economic models.Analysis of how the price of one product is affected by the price of another product,which may,or may not,form part of the relevant product market, is undertaken. In the EC merger law case Aérospatiale-Alenia/de Havilland (OJ 1991 C334/42, [1992] 4 CMLR M2) in October 1991 (where much of the argument centred round the definition of the relevant product market) a market for regional turbo-prop aircraft with 40-59 seats was identified. The Commission distinguished longer distance aircraft, jet aircraft and aircraft with a differing number of seats. The Commission reiterated the definition of the relevant product market as comprising all those products which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use. Defining the market in this way has been a major part of the leading Article 82 cases. In each case companies need to ask whether customers would choose other products as alternatives.This is a matter of fact in every case.The question must be posed as to when a change in price for one product would result in demand increasing for another product (cross-elasticity of demand). In United Brands (above) where prices for bananas rose, demand for other fruits only increased slightly – thus suggesting a separate product market for bananas.The Commission looks at the short to medium term in its analysis. The fact that a rise in price in a market leads to a gradual movement away by consumers to other products over a very long period, will not indicate that the products form part of the same market. In its guidelines on the application of EC competition law in the telecommunications sector (OJ 1991 C233/2,[1991] 4 CMLR 946) of September 1991,the Commission offered some assistance in defining the relevant product market when it states that: ‘A product market comprises the totality of the products which,with respect to their characteristics,are particularly suitable for satisfying constant needs and are only to a limited extent interchangeable with other products in terms of price, usage and consumer preference. An examination limited to the objective characteristics only of the relevant products cannot be sufficient: the competitive conditions and the structure of supply and demand on the market must also be taken into consideration.’ In many cases companies will be aware of the product market in which they compete and their market share, usually through their own market intelligence or industry surveys to which they contribute. However, when presented by the Commission with an allegation of abuse of a dominant position there is always merit in considering whether there is a wider market of which the relevant products form part, which results in smaller market shares.Evidence can then be produced to the Commission
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where the matter becomes the subject of proceedings. Companies often employ economists to back-up their argument over market definition. Article 82 applies where a company holds a dominant position within the common market or a substantial part of it.Again the wider the geographic market,usually, the less likely that a company will hold a dominant position.In assessing whether or not one part of the EC is large enough to amount to a substantial part of the EC the Commission will look at the pattern and volume of production and consumption of the products concerned.The court has held that southern Germany amounted to a substantial part of the EC and that the Belgian and Luxembourg sugar markets,together,were sufficient to amount to a separate geographic market. It appears that the market on which a company is dominant does not necessarily have to be the market where the abuse occurs. In Tetra Pak II (OJ 1992 L72/1, [1992] 4 CMLR 551) in July 1991,Tetra Pak was found to have deliberately run its UK machine operations at a loss over a period of four years due to intense price competition there.This activity occurred on the market for ‘non-aseptic’ machines on which Tetra Pak was not dominant.However,as Tetra Pak was dominant on the market for aseptic machines,and this dominance enabled it to wage a price war on the neighbouring and associated non-aseptic market, the pricing policy was held to be an abuse.There would have to be a connection between the two markets of the type seen in this case before a company dominant in one could be held to have abused its position of dominance on another market. Under the Competition Act the dominance can be in quite a narrow local market, provided the analysis concludes it is a separate market. Some earlier Monopolies and Mergers Commission decisions have investigated one single bus route and found that to be a separate market. In their Guideline 402 on the Chapter II prohibition para. 3.5 the OFT say: The product market ‘The boundaries of the market are determined by taking the products or services relevant to the investigation and looking at the closest substitute products, those products which consumers would switch to if prices of the relevant products or services rose.These substitute products are included in the market if substitution by consumers would prevent prices of the products relevant to the investigation from rising above competitive levels. The alternative products do not need to be perfect substitutes, but alternatives which would fill a similar role to the goods or services in question, and to which consumers would be prepared to switch in the event of a price increase.If such similar goods would prevent price-setting above competitive levels, they should be included in the definition of the relevant product market.’
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The OFT also has guidelines on Market Definition (OFT 403) which are of relevance here.The European Commission’s principal guidance in this field is its Notice on the definition of relevant market for the purposes of Community Competition Law (OJ C372 9.12.97) which is on the Competition Directorate web site www.europa.eu.int.
Joint dominance The Chapter II prohibition and Article 82 specifically refer to abuses by ‘one or more undertakings’.In the Flat Glass decision (Case T-68,77,78/89 of March 1990, [1992] II ECR 1403) the Court of First Instance overturned a Commission finding of joint dominance, though it did not exclude, in principle, the possibility of two independent companies being so united by economic links in a particular market that they jointly occupy a dominant position. This may arise where they hold technology not available to other competitors, for instance. The Flat Glass case confirmed that joint dominance is a possibility, though it will be hard to prove.The OFT has made it clear in its guidance that joint dominance can breach the Act and quotes the Flat Glass case.The OFT could if it wished investigate joint dominance under the monopoly provisions of the Fair Trading Act 1973 which continue to apply notwithstanding the 1998 Act. It has a choice. It is not clear which it will prefer in practice.Where there is an agreement between the dominant companies Chapter I/Article 81 may be the preferred legal weapon against the arrangement, as then there is no need to prove any dominance at all. Companies within a group may be regarded as separate undertakings where the subsidiaries enjoy economic freedom and are more than merely an organ for the actions of the parent company.Where this is the case then such group companies are equally as able to indulge in joint dominance as unconnected companies.Where the parent controls the subsidiary strictly then any action by either or both will be regarded as a potential abuse of a dominant position by them together,parent and subsidiary, the one undertaking for the purposes of these rules. Finally,in Tetra Pak I (OJ 1988 L272/27,[1990] 4 CMLR 47) the Commission held that even if an agreement falls within a block exemption issued by the Commission there may still be an abuse of a dominant position.Where, instead the parties have obtained the benefit of a clearance or exemption under Article 81(3) following an individual notification the Commission will not find an abuse, as it has already analysed the agreement and its background on an individual basis, prior to granting the exemption or clearing the agreement individually. In their guidelines – A guide to the major provisions of the Competition Act 1998 (available on their web site and in hard copy form) (OFT 400 March 1999) the Office of Fair Trading refer to the United Brands v.Commission case [1978] ECR
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207 in saying that a business is dominant if it can behave ‘to an appreciable extent independently of its competitors and customers and ultimately of consumers’. The Office of Fair Trading has issued guidelines – the Competition Act 1998 – Market Definition (available on their web site and in hard copy form) (OFT 403 March 1999) in which they try to provide guidance in this ephemeral area.The guidelines run to 20 pages and will not be summarised here.This is supplemented by the guidelines Assessment of Market Power (OFT 415).Once a company knows what the relevant product and geographic market is it can work out if it is dominant there or not. Normally if it has more than 40 per cent of the market share it is likely to be dominant.The European Commission has issued an important notice on market definition which goes into the same issues.
Abuse of a dominant position However there is no offence in being dominant provided the company acts properly. Indeed dominance may have come about because a company is good for consumers and produces excellent products.There is only an offence when that dominant position is abused. 1.
Predatory pricing This might include a company pricing very low in order to drive a competitor out of the relevant market.
2.
Unfair conditions The imposition of unfair conditions by a dominant company may be an abuse of a dominant position.
3.
Limiting production, markets or technical developments – refusals to supply Refusals to supply a customer who is setting up in competition with the supplier is a classic example under EC competition law of an abuse of market power.Companies proposing to cut off supplies should take legal advice first as to whether this is lawful. If supplies are cut off for good commercial reasons, such as because the supplier has failed to pay for goods,are of course allowed. Advise clients to keep a full record in writing of why supplies were refused.
4.
Making contracts conditional on other conditions – ties Dominant companies must be careful to avoid ties – forcing customers to take other products they may not want.There are many examples under EU law of this,such as the company selling nail guns which made the customer buy the nails to go in the gun from them.
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Mergers are excluded from the Chapter II prohibition.They continue to be dealt with under the Fair Trading Act 1973 which is largely unchanged. As seen above the legislation sets out some examples of actions by a dominant company which will be regarded as abusive. Examples of abuses are considered below.The European Court of Justice in Hoffman-La Roche (referred to above) attempted a definition of abuse and stated: ‘The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of the market where, as a result of the very presence of the undertaking in question,the degree of competition is weakened and which,through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.’ The Chapter II prohibition lists categories of abuse and using this list in conjunction with other examples of activities which the European Commission has held to be abusive in the case law in this field provides the best guide to examples of abusive conduct under this legislation.The principal categories of abuse are set out below.
Refusal to supply No company is obliged under competition law to supply all potential customers or to continue to supply existing customers, where there are good commercial reasons to refuse. A refusal to supply will amount to an abuse of a dominant position only where there is no objectively justifiable reason for refusing the supply. For example, there would be no abuse where a new customer with a bad credit record were refused supplies on credit terms.However,in United Brands (referred to above) the court held that a company could not stop supplying a regular customer who abides by ‘regular commercial practice,if the orders placed by the customer are in no way out of the ordinary’. Cutting off supplies to an existing customer should always be carefully handled and the real motives of those within the company proposing to take this step should be properly analysed. A supposedly objectively justifiable reason for ceasing supplies must be capable of standing up under scrutiny.The Commission will examine whether the action taken (the cutting off of supplies) was proportionate to the failure to pay or other action of the purchaser.
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The type of reasons for cutting off supplies which are likely to result in there being an abuse include where: •
a company finds that its customer has set up in competition and wishes to drive the customer out of the new market by blackmailing it over the supply of the other products
•
as in the Hugin case (Case 22-78,[1979] ECR 1829,[1979] 3 CMLR 345, a decision of the European Court of Justice in May 1979), a supplier wishes to enter a downstream market itself and wishes to cease supplying its distributor.A downstream market is a lower level of supply, such as supply to a distributor by a wholesaler or supply by a distributor to a consumer
•
a supplier does not like the prices or terms and conditions on which its customer resells the goods
•
a supplier objects to the customer parallel importing the goods sold into other EC member states.
This is not an exhaustive list but illustrates some of the types of reasons for refusing to supply, which the competition authorities would not regard as acceptable. Companies refusing to supply where an order is received, which is too large to satisfy the local market alone, will be at risk of abusing their dominant position as the Commission has held that this is abusive.Where there is a shortage of product, there may be an objectively justifiable reason for a refusal to supply. Occasional customers do not have to be treated the same as long-term customers in cases of product shortage. In BPB (Case T-65/89, a Court of First Instance decision of April 1993) the court held that supplying companies which were not stockists of imported plasterboard in priority to those who dealt in such imports was an abuse. Example – Hugin In the Hugin case referred to above, the grocery company Liptons had been the supplier in the UK of Hugin cash registers. Hugin then decided to form its own UK subsidiary company and terminated the distribution agreement. Liptons continued servicing Hugin cash registers and supplying spare parts, but subsequently Hugin refused to supply spare parts to Liptons. Although Hugin sought to argue that it had an objective reason for cutting off supplies because of the technical nature of the products, this argument was not accepted and an abuse of a dominant position was found. This case is also of interest in that the Commission found a narrow market,being that for spare parts for Hugin cash registers,as the relevant market on which market the abuse had occurred.This was because spare parts were ‘not interchangeable
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with spare parts for cash registers of other makes’.Once a purchaser has bought a particular make of cash register then the purchaser is restricted in the types of spare parts which can be used.
Essential facilities One relevant issue in the area of refusal to supply is that of essential facilities. The Commission has on occasion required the provider of essential facilities,such as a port,to grant access to other companies.In the interim measures application, which did not proceed to a final decision, the essential facilities doctrine was applied to the activities of the ferry company, Sealink, which owns the port of Holyhead,in the case B&I Line plc v.Sealink Harbours Ltd ([1992] 5 CMLR 255). It was forbidden to change its ferry sailing times as this would interfere with the ability of its competitor, B&I, to stick to its schedules. The Commission found a breach of Article 82 stating that ‘a company which both owns and uses an essential facility... should not grant its competitors access on terms less favourable than those which it gives its own services’.The decision applies to potential entrants to a market as well as existing competitors. This example of abuse of a dominant position has potential application in a broad range of areas, including access to national networks or infrastructure, such as electricity grids or rail tracks as well as airports.However,it is not a well developed area of EC competition law,so there is little case law on which to draw in determining when a refusal to grant access to those essential facilities mentioned above would amount to an abuse of a dominant position. The essential facilities doctrine could be used to gain access to a supplier’s intellectual property rights to obtain entry to downstream secondary markets, such as those for computer maintenance.The ECJ Magill decision (joined cases C-241/91 P and C-242/91 P) held that in rare cases it could be an abuse of a dominant position to use intellectual property rights to prevent the emergence of a new competing product and to prevent others exploiting a derivative market. Large utilities should always take legal advice before refusing access to a port, network or other system,though accusations of abuse in this field will be difficult to maintain, until or unless the law develops further in this field. The OFT Guideline 414 Assessment of Individual Agreements and Conduct section 7.3 deals with essential facilities. Referring to the Oscar Bronner v. Mediaprint case (Case C-7/97 1998) it says: ‘If a facility is considered to be essential, the Director General would expect competitors to have access at economically efficient prices in order to compete in a related market. If this were not the case, the facility owner would be
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likely to be acting anti-competitively, unless the lack of access could be justified objectively.This is likely to be rare (other than for commercial reasons, such as creditworthiness).The ease with which third party access is afforded to an essential facility will, however, depend on the availability of spare capacity within the facility.’ In practice readers should not assume that it is easy for suppliers to supply them with goods or access to an essential facility. In most cases the law will not help them. Rarely the refusal may be abusive.Take advice.
Keeping records In practice companies can assist themselves in the event of a subsequent investigation by keeping a clear record of the circumstances which led to the refusal to supply.A customer’s poor payment record or other past breaches of contract may justify the cutting off of supplies.Also, evidence which shows that like cases have been treated with like assists greatly in refuting such allegations. If a company can show that it always ceases supplies when a customer behaves in a certain fashion and that the particular customer has not been picked on because of his other activities of which the supplier does not approve,such as a customer selling goods on the grey market, parallel importing them across EC boundaries or beginning to compete with the supplier. (Parallel importing is the practice of purchasing goods cheaply in one country and exporting them for resale in a country where they can be resold at a higher price.) It can be difficult in practice to determine whether a particular refusal to supply amounts to an abuse,as dominant companies are perfectly entitled to take reasonable steps to protect their commercial interests, provided, as the Commission stated in the BBI/Boosey & Hawkes decision (OJ 1987 L282/36, [1988] 4 CMLR 67, in July 1987) that such measures are ‘fair and proportional to’the threat against which the companies are seeking to protect themselves.The Commission went on to state that ‘the fact that a customer of a dominant producer becomes associated with a competitor or a potential competitor of that manufacturer does not normally entitle the dominant producer to withdraw all supplies immediately or to take reprisals against that customer’.
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Refusing to supply new customers What is not yet clearly established is the extent to which a refusal to supply a new customer can be an abuse.It is certainly harder to prove that there has been an abuse where there is no established course of dealing between the parties. In the British Petroleum v. Commission decision ([1978] ECR 1513, [1978] 3 CMLR 174) the ECJ held that BP had not abused its dominant position by refusing to supply an occasional customer, ABG, with crude oil. BP had warned ABG of impending shortages and serviced its regular customers in priority. Using Chapter II Chapter II,of course,can be used by companies which wish to be supplied with products by competitors or others.Often the threat of proceedings will be sufficient to result in the company which had been refusing to supply resuming supplies. No company,particularly one with a strong market position and high public profile, wants to be saddled with an investigation for reasons of cost (both management time and lawyers’ fees) and the bad publicity which arises. Even where an abuse allegation is successfully defended the public image of the company against which the allegation was made is highly likely to have been tarnished. Companies proposing to cut off supplies should consider the following points: •
Is the supplier in a dominant position?
•
What is the position of the purchaser? Is it a competitor, potential competitor,new entrant to the market or an old established customer?
•
What are the real reasons why the supplies will be stopped? Are they objectively justifiable?
•
Is it likely that the purchaser will complain to the Commission? Is the purchaser well advised and legally sophisticated? Can it be bought off, by offering an amicable settlement?
•
Are there ulterior grounds which the purchaser could allege are the real anti-competitive reasons for supplies ceasing?
•
Can the supplying company prove its reasons for ceasing supplies and show that other customers in the same position are treated in the same way?
Giving the reasons for cutting off supplies may pre-empt allegations of abusive conduct and head off a complaint to the competition authorities.
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Unfair or excessive prices One advantage of enjoying a dominant position is that companies are, to some extent,freed from market constraints and are more easily able to raise prices,without needing to be concerned about their competitors. There have been few competition decisions concerning excessive pricing and none which held that this alone, without other abuses, comprised an abuse of a dominant position.The OFT Guideline 414 Assessment of Individual Agreements and Conduct section 2 deals with excessive prices.It says a price will be an abuse where the price allows the undertaking ‘to sustain profits higher than it could expect to earn in a competitive market’.The OFT calls these supra-normal profits. In practice competitive regulators do not like to set themselves up as determining what is fair pricing and what is not.Any comparison of industries and what is a normal profit margin in one area is five times as high as another. No regulator wants to be an arbiter of such matters and there have been virtually no excessive pricing cases, despite increase in price being the most likely consequence of dominance, with consumers having no one else from whom they can purchase if the supplier is truly dominant. It is difficult for the Commission to establish that prices are excessive,as the evidence which it would require is not readily available.In United Brands (referred to above) the court made it clear that charging prices which have no reasonable relation to the economic value of the product supplied would be an abuse, but overturned the Commission’s finding of excessive pricing in its decision in this case. In assessing whether pricing is excessive the Commission will examine the relationship between the cost of the goods and their selling price. Difficulties arise where goods are sold at widely different prices in different EC member states. The market may be able to bear higher prices in some states. Is this difference in pricing an abuse? Where such a pricing policy results in geographical market partitioning then an abuse may be found; however, there have been few cases in the excessive pricing field, so the risk of infringement is small.
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Different prices in different EC member states The issue of whether dominant companies operating within the EC can be obliged to charge the same price for their goods throughout the EC was addressed in the Tetra Pak II Commission decision, where the Commission stated that: ‘Tetra Pak’s charging of selling prices for its cartons varies considerably from one Member State to another.This is discriminatory and constitutes an abuse within the meaning of Article 86 [as it then was, now article 82] of the EEC Treaty.It has been demonstrated that the relevant geographic market in this case, bearing in mind that transport costs are negligible, is the Community as a whole.The price differences observed cannot be explained in economic terms.’ This was particularly the case,in this decision,as the raw materials for the cartons made up 70 per cent of the cost.The price differences were made possible by other measures of Tetra Pak’s to compartmentalise markets. It must be stressed that there is no general requirement to impose uniform prices throughout the EC.Many companies are moving towards such a single pricing policy in the single market for a number of reasons, not least to discourage the parallel importation of their products across EC boundaries.Such harmonised pricing does remove the risk of allegations that differing pricing policies infringe Article 82. However,different prices may be justifiable,even for dominant companies,where, for example,national regulations have a significant influence on prices.This is often the case for pharmaceuticals,the price of which is kept deliberately low for political reasons in a number of member states.Wine will always be cheaper in the village by the vineyard than in the upper reaches of northern Europe after allowance has been made for transport costs. The relevant question in assessing whether pricing policy infringes Article 82 will be whether there are economically justifiable reasons why prices differ throughout the EC. Can a dominant company justify differing prices on the grounds that consumers in particular member states are simply prepared to pay more for goods for historical reasons or perhaps because wages are higher there? Provided a company does not seek geographically to partition the EC market and prevent the parallel importation of its goods in such circumstances,then such differential pricing is unlikely to amount to an abuse of a dominant position.The safest position, therefore, is to achieve single European pricing.
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Predatory pricing Chapter II proscribes unfair pricing.Dominant companies selectively reducing prices to prevent competitors establishing or consolidating their position in the market may be acting abusively.There is no offence in pricing competitively and in practice it can be difficult to distinguish predatory pricing from a normal competitive response. Discriminatory pricing may also be an abuse of a dominant position, where for the purposes of restricting competition a dominant company offers better or worse prices to a third party than are offered in relation to comparable transactions.The Akzo v. Commission decision of the European Court of Justice of July 1991 (Case C-62/82, [1991] I ECR 3359) assists in making the distinction between predatory and acceptable pricing. Case example – Akzo Chemie Akzo Chemie was held to have attempted to drive its small competitor ECS out of the market when ECS proposed to use its profits from its UK flour additives operation to expand into the organic peroxides market in the EC. Akzo was alleged to have threatened to reduce its prices in the UK flour additives market unless ECS agreed not to enter the organic peroxides market.When ECS did not capitulate, Akzo was accused of adopting uneconomic prices. Akzo alleged that as it made a profit on all sales it could not be accused of predatory pricing. Its prices were above average variable cost.The price covered the costs of the item sold but made no contribution to other necessary overheads of the company,such as running a factory.It could not,therefore,maintain prices at that low level over the full range of its products. This was the first decision of the European Court of Justice on predatory pricing. The ECJ upheld the Commission’s decision almost entirely,though reduced Akzo’s fine to 7.5m ecu. In determining whether a company has been guilty of predatory pricing the Akzo v. Commission decision has the effect that there will be an abuse where: •
a company charges prices below its average variable costs (average variable costs are direct costs and vary with the level of output; in transport the cost of fuel would be a variable cost,whereas labour would be a fixed cost); or
•
a company charges prices above average variable cost,but below average total costs where there is a plan to eliminate a competitor (an exclusionary intention).
A company can ascertain how much it costs to produce a product A.There will be the cost of materials (a direct cost) for example.This may give a figure of £20 per unit as an average variable cost.If it resells the unit at £15 to drive a competitor
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out of the market,this may be an abuse of its dominant position.The price is below average variable cost. If it feeds into its calculations the overhead cost too, such as the costs of labour in producing product A,then the costs are higher. This may give a figure for average total costs of £22. If it resells the product at £21 this may also be an abuse. It has covered its fixed costs, but not the total costs. In practice it is not at all easy to ascertain these figures in undertaking cost/price analysis.For many companies parts of a business are more profitable than others and subsidisation of a more profitable line for a less popular product is common. Pricing may be unfair where a purchaser is not allowed a sufficient price margin to allow it to compete in a downstream market against the supplier, as in the National Carbonising Company v.Commission ([1975] ECR 1193,[1975] 2 CMLR 457) case.
Discounts and rebates Companies in a dominant position need to ensure that they do not abuse their strong market position in the way that discounts and rebates are given and to whom they are available. It should be clear that the discount or rebate is not discriminatory, clear and transparent and related to cost. Dominant companies offering rebates to customers who take all of their requirements for a particular product from the dominant company will abuse their dominant position.These are known as fidelity or loyalty rebates. In the Hoffman-La Roche decision (referred to above) the court held that: ‘An undertaking which is in a dominant position on a market and ties purchasers – even if it does so at their request – by an obligation or promise on their part to obtain all or most of their requirements exclusively from the said undertaking abuses its dominant position within the meaning of Article 82 of the Treaty whether the obligation in question is stipulated for without further qualification or whether it is undertaken in consideration of the grant of a rebate.’ The Court also held that an informal system of fidelity rebates would infringe such rebates occurring, where discounts are offered which are conditional on the customer obtaining all or most of its requirements from the dominant company (ties). The Commission has also held that target rebates, where the purchaser obtains a rebate based on his purchasing particular quantities over a long reference period, perhaps of the order of 12 months,can amount to an abuse of a dominant position.
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The purchaser is put under considerable pressure to continue to purchase from the supplier towards the end of the reference period. Companies which do not enjoy a dominant position will be entirely free to set what prices they choose, provided that they do not enter into collusive arrangements with competitors, suppliers or purchasers concerning prices.
Unfair conditions The imposition of unfair conditions by a dominant company will amount to an abuse of a dominant position.There is no definition in Chapter II of what comprises unfair conditions, but case law illustrates the types of condition which will be caught by the prohibition.The following have been held to be unfair conditions: •
a leasing contract running for a term exceeding the useful life of the machine leased
•
a prohibition on purchasers of a machine adding accessory equipment to that machine
•
a prohibition on resale or moving the location of purchased equipment without the consent of the original seller.
In the US Microsoft case [2000] the court held that Microsoft’s tying of its own Internet software to its products amounted to unfair conditions and a tie. Any condition may be capable of being challenged as unfair,so no exhaustive list can be given. Companies seeking to impose conditions need to consider carefully whether there is any objective justification for such conditions and whether that justification is likely to be capable of convincing the Commission.
Discrimination One of the most basic principles which comes out of Article 82 and the Chapter II prohibition is the obligation not to discriminate.Like cases must be treated alike. This concept was considered in connection with refusals to supply goods and price discrimination above, but is equally relevant where terms and conditions are offered to purchasers or suppliers.Offering companies from one member state worse conditions than those offered to those in another country can amount to an abuse of a dominant position. Chapter II expressly prohibits applying dissimilar conditions to equivalent transactions thereby placing other trading parties at a competitive disadvantage. Attempts selectively to tempt customers away from obtaining their supplies from a competitor can be an abuse where those customers are offered preferential terms and conditions. In Hilti v. Commission (Case T-30/89, [1992] 4 CMLR 16),
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a Court of First Instance decision, in December 1991, Hilti obtained details of its competitors’ main customers and offered those customers better trading conditions. As Hilti’s other customers did not receive the benefit of those conditions, this was held to be an infringement of the law.
Ties Chapter II prohibits making the conclusion of contracts ‘subject to the acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts’. What this means is that dominant companies should not require customers to buy unrelated additional products which they may not want. The cases best illustrate the application of this provision. •
In British Telecommunications (OJ 1982 L360/36,[1983] 1 CMLR 457), decided in December 1982, the Commission held that BT had abused its dominant position, which it enjoyed by virtue of its then status as a public corporation with a monopoly for providing telecommunications services in the UK. BT prohibited message forwarding agencies from relaying telex messages originating outside the UK and for delivery outside the UK.It was condemned for making the telephone and telex installations subject to ‘obligations which have no connection with the assignment of telephone or telex services’.
•
In Hoffman-La Roche (referred to above) rebates tied to overall purchases of goods in different markets were held to amount to tying clauses contrary to Article 82(d).
•
Hilti AG sought to encourage purchasers of its nail guns to use Hilti nails in the guns, by supplying cartridge strips only to end users or distributors who purchased the gun with nails.This was held to amount to a tie, in the Hilti decision (see above).
•
In the Tetra Pak II decision (OJ 1992 L72/1,[1992] 4 CMLR 551,in July 1991),purchasers of Tetra Pak machines were obliged to use only Tetra Pak manufactured cartons on those machines.Tetra Pak sought to argue that it regarded itself as a supplier or an integrated distribution system and that there were technical reasons of product liability, health and the need to protect Tetra Pak’s reputation,and this was why the tie was necessary. The Commission rejected those arguments,commenting that there was evidence that Tetra Pak sold its own cartons for the machines of other manufacturers and that the public health problems could be solved in
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other ways.The Commission held that ‘the proportionality rule excludes the use of restrictive practices where these are not indispensable’. Companies in a dominant position which require that purchasers buy products in unrelated areas will infringe the law. In its Guideline 414 the OFT says at para.6.6 ‘Tie-in sales and bundling:where the manufacturer makes the purchase of one product (the tying product) conditional on the purchase of a second product (the tied product)’and abuse can occur.Such ties discourage ‘a retailer from stocking the product of new manufacturers if the new products would displace sales of the tied products’. Suppliers of machines and products often make substantial profits from the sale of accessory products or consumables,such as the nails for a nail gun or the toner for a printer.It can be difficult to determine the extent to which such peripheral or accessory ties amount to an abuse.Where there are objectively justifiable reasons why the tie is necessary then there will not be an abuse. Companies seeking to impose such requirements, therefore, should keep as much evidence as possible concerning the technical reasons why the tie is imposed.Scientific evidence that the machine will not operate properly without the accessories of the supplier should be amassed,with an explanation as to why competitive products will not operate as effectively. In all cases the least restrictive tie imposed the better.A provision allowing the use of competitive products where the purchaser obtains the prior written consent of the supplier may be preferable,though even there such tie must be justifiable. Ties under patent licences, as discussed in Chapter five, are allowed where technically necessary for a satisfactory exploitation of the licensed invention. Ties should always be treated with caution. Not only may they infringe EC competition law,but national competition law may be broken.In patent licences they are only allowed under regulation 240/96 (see Chapter two) where they are necessary for a technically satisfactory exploitation of the licensed product. The Competition Act 1998 abolished a tying provision in s44 of the Patents Act 1977 however.
Abusive exercise of intellectual property rights Technology, particularly that protected by patents and copyright, can enable companies to corner lucrative markets.There is justification for such protection by the law of intellectual property rights, given the vast sums which companies spend on research and development,which they can only recoup by thus gaining large market shares or licensing the rights to a third party manufacturer in return for a royalty payment.
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Companies in a dominant position are becoming increasingly used to allegations of abuse being directed at them for failing to license intellectual property to competitors or other third parties and even for seeking to enforce such rights vigorously. Whilst in theory refusal to license rights and bringing court proceedings for infringement can amount to an abuse,in practice there have been few cases where such allegations have been successful.In the leading EU decision in RTE and ITP v.Commission (Magill) [1995] 1 ECR 743 the court held that in rare cases a refusal to licence which prevents a new product emerging for which there is consumer demand could be an abuse. In its Guideline 414 the OFT say however that ‘in general refusal to license is not an abuse’. There is no general principle of competition law requiring dominant owners of intellectual property rights to license their rights to all who request a licence. It will only be in rare cases that a refusal to license amounts to an abuse. In the Volvo v.Veng decision (Case C-238/87, [1988] ECR 6211, [1989] 4 CMLR 122 of October 1988) concerning automobile body panels, the court held that Article 82 would not normally require the owner of intellectual property rights to license such rights as this would amount to depriving the owner of the rights of the specific subject matter of the rights.However,the Court did state that there may be an abuse where the refusal is accompanied by anti-competitive conduct: •
where there was an arbitrary refusal to supply spare parts to independent repairers
•
where a manufacturer sets prices for spare parts at an unfair level
•
where a manufacturer decides no longer to produce spare parts of a particular model even though many cars of that model are still in circulation.
Dominant companies should, however, protect their position by ensuring that where they propose to refuse a request for a licence they: •
ensure that ‘like’ companies or requests are treated alike, so that no discrimination can be alleged
•
keep full details in writing concerning the refusal in case it becomes the subject of a Commission investigation later.
In Tetra Pak (Court of First Instance 1990,Case T-51/89,[1990] II ECR 309,[1991] 4 CMLR 334) the acquisition by Tetra Pak of exclusive rights to a patent was held of itself to amount to an abuse. Although the court held that the mere acquisition of intellectual property rights by a dominant company would not,per se,be abusive, it did find that in this case there was an abuse, as in this case the acquisition considerably strengthened Tetra Pak’s dominance and prevented or delayed new
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companies coming on to the market.Even though the exclusive licence fell within the Commission’s block or general exemption for licence agreements of this sort, it was still an abuse. Other activities in relation to intellectual property may amount to abuses,including bringing excessive,intimidating and unjustified threats to sue all new competitors.
Other abuses Other abuses include the abusive buying up of competitors’machines,eliminating competitors from the market or depriving them of trade references,approaching customers to obtain undertakings that they will no longer use rival machinery, monopolising specialist advertising media and putting pressure on suppliers to cut off supplies to competitors. In Akzo (see above) it was held to be an abuse, as part of a strategy to eliminate a competitor,merely to collect information from the latter’s customers about the price it was offering them. The motive behind a particular action in many cases is the most important factor in determining whether or not there is an abuse, as much as the action itself.
Conclusion Many companies enjoy positions of market dominance through their superior products and customer relationships.Competition law does not forbid dominance, merely its abuse.Dominant companies should take seriously customer complaints of dominance and ensure that a full internal investigation is made as Commission proceedings can be expensive and time consuming. Chapter II can be of use to those companies denied supplies of products on an arbitrary basis.Companies operating in the market for spare parts,consumables, accessories and so on, may be able to ensure that supplies are made to them by raising the issue of Chapter II.Companies generally treated unfairly by dominant companies can find Chapter II a useful means of ensuring that they are properly treated.Complaints to the company concerned and to the OFT/Commission and proceedings before the national courts can be brought for breach of Chapter I/Article 82 (see e.g. Yeheskel Arkin v. Borchard Lines Ltd and Others ([2000] UKCLR 495, High Court, 11 November 1999). Companies wishing to discourage new competitors or drive a competitor out of the market need to be cautious as to what action is taken to achieve the desired end.Ensuring a good product sold at a competitive,but not predatory,price,backed up with extensive and attractive advertising may achieve the aim.Most measures directed at the competitor could be regarded as abusive unless otherwise justifiable.
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Companies which do not enjoy a dominant position have little to fear unless they enter into restrictive agreements contrary to Chapter I.
Further information Relevant OFT guidelines all on the OFT web site at www.oft.gov.uk under Technical Guidelines are: •
The Chapter II Prohibition OFT 402
•
Market Definition OFT 403
•
Assessment of Market Power OFT 415
•
Assessment of Individual Agreements and Conduct OFT 414.
The European Commission competition decisions in this field can be accessed via: www.europa.eu.int/comm/competition/antitrust/cases/
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Compliance and enforcement COMPLIANCE MEASURES COMPLIANCE PROGRAMMES F U RT H E R I N F O R M AT I O N
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Chapter 5: Compliance and enforcement This chapter looks at the importance of compliance with the Competition Act 1998 and how it is enforced. Companies need to assess the risk of their breaching UK or indeed EU competition law.The OFT has suggested the following questions a business can ask: •
What is the company’s position in the market? –
are any of its relations with others likely to have an appreciable effect on competition in any market in which it operates?
–
could it be said to have a dominant position in any market in which it operates?
•
Is there scope for sales, purchasing or marketing staff to enter into arrangements which might infringe one of the prohibitions without the knowledge of senior employees?
•
Do employees or directors of the undertaking have regular contact with competitors, on a business or social footing? This may be particularly likely where the company is a member of a trade association or similar body (the OFT has a Guideline on Trade Associations OFT 408). It is important to note that the Act catches informal understandings as well as formal agreements which have an appreciably anti-competitive effect.
Compliance measures Companies have to tell their employees about competition law.Whilst it may be self-evident to executives that they cannot fix prices or partition markets,not all staff know this and others subject to stringent sales targets may be tempted to reach covert agreements with competitors. If they know they might lose their job for doing this then they may be restrained from putting the company at risk of 10 per cent of turnover fines. Not only are the fines heavy, but so too is the negative publicity and there is a heavy burden to be borne by directors when an investigation is being undertaken by the OFT, not only in directors’ time but also in the payment, usually of external lawyers’ fees. In some companies there is already a culture of competition law compliance. Employees are fearful of even telephoning competitors and there are strict rules to which employees adhere about reporting contact with competitors which might be construed as anti-competitive.In other companies competition law is ignored.
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In some industries secret price fixing remains common and businesses assume that as others get away with it so will they. That will have to change. Companies need to ensure that from top management down employees know that restrictive practices are prohibited and that the company will take stern action against those who breach the rules.In the UK ready mixed concrete investigations led to fines of millions of pounds for contempt of earlier restrictive practices a few years ago. In some companies no one had ever been disciplined for breaching the company’s policies on restrictive practices;yet the compliance programmes were very well drafted.Compliance programmes must not only exist but also be enforced. This may also result in smaller fines. Under both UK and EC law the measures taken by companies to prevent employees breaching the rules are taken into account when deciding the level of fine. However under UK and EC competition law a company cannot avoid breaking the rules by alleging that the employee concerned broke company policy in entering into a cartel arrangement.The company will be responsible as it is the employer. The employee is acting in the course of his or her employment.In the EC the Parker Pen and in the UK the Ready Mixed Concrete decisions made this clear. If employees are unaware of the law in this area then obviously they may breach it. Competition law is not something people learn at school and it is not correct to assume all staff will know that even blatant breaches such as price fixing cartels and resale price maintenance breach the law.The OFT say that ‘awareness needs to be spread among all employees, not just those in the sales, marketing and purchasing areas’. Those involved in areas such as research and development, distribution and after-sales service need to be aware of the law. As Chapter three of this Report showed there are special competition law regulations on R&D and distribution.
Free material The OFT guidance notes,leaflets and videos on the Competition Act are all available free of charge and can help in educating staff as part of a competition law ‘compliance programme’. Most competition lawyers can assist in the drafting of any written materials required and talks to staff.
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Compliance programmes A compliance programme will vary depending on the company concerned.The OFT say there is no standard programme available which would apply in all cases. The features it should contain are: a)
Support of senior management (the OFT suggest a personal message to staff from a senior individual showing their commitment to the programme would help as would having a board member with responsibility in this area)
b)
Appropriate policy and procedures, this should include:
c)
•
Commitment to comply with the Act
•
Duty on employees and directors to comply and an undertaking from them to do so
•
Likelihood of disciplinary action for breach – essential if the programme is to be taken seriously.
•
Telling staff to seek advice to check if transactions breach the law
•
Obligation on staff to report activities which infringe the Act
•
Issuing of a compliance handbook or manual which might contain: 1.
A clear statement of the policy on compliance and consequences of breaching the policy (e.g. the sack)
2.
Details of the legislation – explanation of main provisions, investigatory powers of competition authorities and consequences for the company if there is a breach
3.
Examples of types of conduct which are illegal referring to the company’s particular circumstances
4.
Details of the company’s compliance procedures.
Training: the OFT regard training as crucial in any compliance programme – both training on the law and the company’s own compliance procedures.It should be part of the induction programme for new staff and offered on a continuing basis,not least because the law changes and staff will need to be updated.The OFT suggest: •
seminars
•
video presentations
•
role play.
A record should be kept of any training given.
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Evaluation: compliance as described above is of no use if it does not work. Evaluation is therefore necessary such as: •
testing individual employees on their knowledge of law,policy and procedures
•
individuals and their department’s appraisal partly based on adherence to the compliance programme
•
formal audits of sales and procurement processes,with unannounced, or by appointment, checks for actual and potential infringements
•
means to report actual and potential infringements to senior management and steps to put the problem right.
Mitigation The OFT will take a compliance programme into account in mitigation when penalties are imposed.However it will not result in a company being exonerated. The company remains liable for the breaches of competition law by its staff,even if the staff are not complying with competition law in so doing.
Leniency The OFT operates a ‘leniency’ programme, details of which appear on its web site under leniency. This applies to whistleblowers in cartel cases. Individuals reporting their employers should have their jobs protected by the Public Interest Disclosure Act and any sacking of someone who ‘spills the beans’ will lead to a claim for unfair dismissal. The OFT will not endorse individual compliance programmes as that is not their role. Competition lawyers can draft and advise on such programmes.
Enforcement For many the provisions of the Chapter I and II prohibition will be familiar because they mirror the provisions of EC competition law,though without the requirement that the arrangement effects trade between EC states.However the detail of how the new rules will be enforced is also of importance.The Competition Act 1998 significantly extends the powers the Office of Fair Trading has to enforce UK competition law. Reference should be made to Enforcement (OFT 407) the OFT guidelines on this topic.The Act permits the Director General of Fair Trading to conduct an investigation if there are reasonable grounds for suspecting that either the Chapter I prohibition or the Chapter II prohibition has been infringed.
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The Director General may also require documents to be produced.There are also rights to enter premises. In certain cases this can be without a warrant.There must be a reasonable suspicion of a breach of the prohibitions having occurred before such a right to enter premises arises.Usually two working days’notice must be given at least of the intended entry.The notice is given to the occupier of the premises, not the landlord. The notice should indicate the subject matter and purpose of the investigation and the nature of the alleged offences. There is no requirement to give notice where the DGFT has a reasonable suspicion that the premises are or have been occupied by a party to an agreement or abusive practice being investigated. Where entry is exercised without notice the investigating officer has to produce certain documents.
What can the OFT do at business premises? An investigating officer is authorised to take with him any equipment which he may believe to be necessary.The investigating officer can require any person at the premises to produce any document which he considers relates to any matter relevant to the investigation and if it is produced an explanation of it.He can also ask where documents are. Warrant When searching premises other than those of the alleged infringer the OFT need a warrant before going in. Applications for warrants are made to a judge in accordance with the rules of the court which are already laid down for search warrants.The judge may issue a warrant if he is satisfied that: a)
there are reasonable grounds for suspecting that there are documents on the premises,the production of which could be required and which have not been produced as required – so someone has been asked but has refused to hand over documents.(If they have been asked and refused, they may have shredded them in the meantime of course, despite that being against the law)
b)
there are reasonable grounds for suspecting that there are documents on the premises, which the DGFT has power under to require to be produced and if the documents were required to be produced they would not be produced but would be concealed, removed, tampered with or destroyed.Therefore if asking for the documents is likely to lead to their destruction the DGFT can obtain a warrant and seize them
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an investigating officer has tried to enter the premises but was unable to do so and there are reasonable grounds for suspecting that there are documents on the premises,the production of which could have been required under that section.This would apply if the DGFT first tried to gain entry without a warrant but was refused entry.
The warrant will authorise entry to premises ‘using such force as is reasonably necessary for the purpose’.
Decisions The result of DGFT investigations will in some cases be a formal decision – such as deciding a cartel had been in existence and fining the companies concerned. Before a decision is made by the DGFT about a breach of the rules a written notice must be sent to those who would be affected by the decision and they should be given the opportunity to make representations.There may be a formal hearing and the companies could appoint solicitors and barristers to represent them as happens at oral hearings before the European Commission.
Interim measures The Act gives powers to the DGFT to impose immediate orders – known as interim measures.These are similar to an emergency injunction under current English law.The European Commission already has similar powers.The section applies if the DGFT has a reasonable suspicion that there has been a breach of the Chapter I or II prohibitions but has not completed his investigation.The right applies where the DGFT believes that it is necessary for him to act as a matter of urgency to: •
prevent serious, irreparable damage to a particular person or category of person
•
protect the public interest.
Offences There are a variety of offences under the Act such as supplying misleading information to the DGFT. Those subject to investigations should take legal advice. Individuals could also be individually fined where a body corporate commits an offence and it is proved to have been committed with the consent or connivance of an officer or attributable to any neglect on his or her part. Officers who can be guilty of an offence are: •
directors
•
managers
•
secretaries (company secretaries)
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•
similar officers
•
person purporting to act in that capacity.
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Under investigation The OFT has a simple booklet called Under investigation which provides a short introduction to investigations. Further information is contained in the detailed guidance notes of the OFT mentioned above.It describes how investigating officers will identify themselves (they will hand over a notice and ID) and the powers they have at premises (mentioned above).
First raids At the date of writing the OFT appear to have launched a raid only once since the 1 March 2000 when their new powers came into being. They raided the headquarters and two Yorkshire sites of FirstGroup and Arriva bus groups. They were looking for possible route-fixing in Leeds by the companies.The investigation was sparked by the companies each cancelling a route in areas dominated by the other party. First Group has allegedly 80 per cent of the market and Arriva 12 per cent mostly in South and West Leeds.The OFT were quick to point out that a raid does not mean guilt. Until a decision is reached a company is not held in breach of the law and at the date of writing the OFT investigation had not been completed. No doubt other raids will follow.
Further information The best source of information is the OFT web site at: www.oft.gov.uk clicking on Competition Act section. The OFT guidelines are on the above web site.They can also be obtained free by post from the OFT,Tel: 0870 60 321. The Competition Act Enquiry Line is on Tel: 020 7211 8989, or e-mail:
[email protected] The OFT leaflet on How your business can achieve compliance: A guide to achieving compliance with the Competition Act 1998 is on the OFT web site at: www.oft.gov.uk/html/comp-act/download/oft424.pdf Competition lawyers are listed under Competition/Anti-trust in the Chambers and Partners’ legal directory which is at: www.chambersandpartners.com
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Conclusion
CONCLUSION
Conclusion The Competition Act 1998 has yet to rear its ugly head in any substantial way. At the date of writing the Act has been in force for a year. •
The OFT have carried out raids on only two companies.
•
Only about seven companies have notified an agreement for exemption.
•
One block exemption on public transport ticketing schemes has just been issued 1.
•
The OFT is also not currently able or willing to investigate all complaints which are brought to its attention.
•
No penalties (fines) have been levied.
What does this mean? The OFT claims to have been extremely busy behind the scenes, and indeed this is the case.They have been investigating many breaches of the legislation and complaints. On 7 March 2001 they issued their report on the ‘Professions’and recommended major changes – an investigation started under the previous legislation. It is likely that during 2001 and 2002 the first formal decisions will be taken and fines levied.It was inevitable that a period of transition would be needed. On 9 February 2001 the OFT launched a formal Competition Act enquiry into the supply of compact discs.On 19 February 2001 the OFT launched a cartels education campaign,which urges businesses to complain – if they suspect a cartel is operating; comply – with the Competition Act 1998 to avoid the heavy penalties; or confess – if they are a member of a cartel and wish to benefit from the OFT’s Leniency Programme. On 24 April 2001 hearings start on the OFT challenge to resale price maintenance for over the counter medicaments – again a case begun under the old legislation. The Act, however, has already caused most major UK companies to alter their compliance programmes,check existing contracts to ensure compliance with the law and educate staff as to the implications of the legislation.
1
The Competition Act 1998 (Public Transport Ticketing Schemes Block Exemption) Order 2001 (SI 2001, No. 319) was laid before Parliament on 8 February 2001. It came into force on 1 March 2001 and provides that certain types of public transport ticketing schemes receive the benefit of a block exemption as long as they meet certain conditions set down in the block exemption Order. This is the first block exemption Order made under the Competition Act 1998.
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CONCLUSION
Many clients of the writer have used the Act to their advantage in requiring dominant companies to resume supplies of products or services to a customer or otherwise amend their abusive practices to comply with the Act.Agreements can now be checked from an EU and UK competition law perspective which is the same,not radically different as was the case under the Restrictive Trade Practices Act 1976. Legal costs are, thus, saved.
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