Competition Law – the basics

This guide was last updated in May 2005.

Introduction

Open and healthy competition is good both for consumers and for businesses. If businesses compete on a level playing field, they will flourish, and consumers are more likely to pay lower prices, and get better quality and more choice. This is the premise on which competition law is based.

Businesses (whatever their legal status, size and sector) need to be aware of competition law not only so they can meet their obligations under it but also so they can assert their rights and protect their position in the market place.

Anti-competitive behaviour which may affect trade within the UK is prohibited by Chapters I and II of the Competition Act 1998. Where the effect of the anti-competitive behaviour may be felt at an EU-wide level, it is prohibited by Articles 81 and 82 of the EC Treaty.

UK and EC competition law prohibit two main types of anti-competitive activity:

• anti-competitive agreements between businesses (Chapter I / Article 81 prohibition);
• businesses abusing their dominant market position (Chapter II / Article 82 prohibition).

Anti-competitive agreements between businesses (Chapter I / Article 81 prohibition)

To be caught by the prohibition on anti-competitive agreements, there must be an agreement:

• between businesses, decisions by associations of businesses (e.g. trade associations) or concerted practices (i.e. co-operation between businesses that falls short of being an agreement or decision);
• that prevent, restrict or distort competition in the EU or UK (or part of the EU or UK) to an appreciable extent or are intended to do so; and
• which may affect trade in the EU or UK (or part of the EU or UK).

Whether an agreement is anti-competitive is assessed on the basis of its effect on competition or its objective, rather than its wording or form. This means that verbal, written, informal and formal agreements are all capable of being anti-competitive (e.g. a gentleman's agreement or an agreement concluded over the telephone).

Types of agreement and appreciable effect on competition

Agreements will only be caught by the competition rules where they have or would have an appreciable effect on competition. Whether this is the case can depend, amongst other things, on the market shares of the parties to the agreement, the content of the agreement and the relevant market in which the parties operate. In general, market shares of less than 10% at EU level and less than 25% at UK level will mean the competition rules do not apply.

However, the competition authorities take the view that certain types of agreement, by their very nature, always restrict competition to an appreciable extent and so are prohibited under competition law. This includes agreements that have as their object or effect:

• direct or indirect price fixing (e.g. agreeing a minimum sale price or level of discount) or resale price maintenance;
• limiting or controlling production, markets, technical development or investment (e.g. agreeing quotas or levels of output);
• market or customer sharing (e.g. agreeing not to compete with another supplier in certain product or geographical markets).

Other agreements may be prohibited if, in the individual circumstances of the case, the agreement has an appreciable effect on competition. This includes agreements that have as their object or effect:

• joint purchasing or selling (e.g. agreement between purchasers as to which suppliers they would buy from or agreement to share a distribution network);
• information sharing (the more recent, detailed and sensitive the information shared, the more likely the exchange is to be viewed as anti-competitive);
• standardisation agreements (e.g. if they prevent manufacturers from developing other standards).

Exemptions

The general rule is that an anti-competitive agreement is prohibited unless it is excluded or exempted from the competition rules. Agreements that may affect trade within the EU may be exempted under a "block exemption" (i.e. a group exemption, which automatically exempts agreements falling within its terms) and agreements that may affect trade within the UK may be exempted under a parallel exemption (i.e. essentially an automatic exemption from the UK rules if the EU block exemption would apply if EU law applied). Different block exemptions may apply depending on the nature of the agreement or the market sector concerned (e.g. insurance, transport).

If an agreement does not fit squarely within a block exemption or parallel exemption it is not automatically unlawful or unenforceable. This will only be the case if the agreement has an appreciable effect on competition. Businesses may also wish to consider whether an agreement may be exempted on the grounds that the restrictions of competition are outweighed by the agreement's beneficial effects (the exemption criteria are set out in Article 81(3) of the EC Treaty and Section 9 of the Competition Act 1998).

Modernisation and self-assessment

It used to be the case that businesses could notify an agreement to the European Commission or the Office of Fair Trading (OFT) and request an individual exemption. This provided businesses with legal certainty, but since 1 May 2004, following a change in EU rules, businesses must now bear the risk of self-assessing whether their agreement meets the exemption criteria.

Businesses that abuse their dominant market position (Chapter II / Article 82 prohibition)

Businesses with significant market shares must take care not to exploit their strong market positions in an anti-competitive way. The abuse by a business of its dominant position is strictly prohibited under competition law. Having a dominant position per se is not a breach of competition law. It is the abuse of that position that is prohibited.

To be in a position of dominance, a business must have the ability to act independently of its customers, competitors and consumers. This requires a complex assessment of a number of elements, including market definition, market shares, conditions of competition, entry barriers and buyer power. As a very rough rule of thumb, if a business has a 40% market share then there is a presumption of dominance.

Examples of behaviour that could amount to an abuse by a business of its dominant position include:

• unfair trading terms: imposing unfair purchase or selling prices or other trading conditions (e.g. exclusivity, excessive or predatory pricing);
• refusal to supply;
• tying: requiring acceptance of unrelated supplementary obligations.

Unlike the exemption regime available in respect of anti-competitive agreements, there are no similar exemptions available where a business may be abusing its dominant position, although there may be objective justification for such behaviour in certain circumstances (e.g. refusal to supply may be based on a particular customer's poor credit rating) and so, no infringement of competition law.

Enforcement of competition law

Following the change to the EU rules on 1 May 2004, UK competition authorities are now empowered to apply and enforce Articles 81 and 82 of the EC Treaty in addition to their existing powers to enforce the Competition Act 1998. The OFT is the principal competition law enforcement authority in the UK. In addition, there are a number of sectoral regulatory authorities which apply these competition law provisions concurrently with the OFT in the regulated sectors (e.g. the Gas and Electricity Markets Authority (OFGEM)).

The UK competition authorities have significant powers to investigate suspected anti-competitive behaviour (including entering and searching business premises with a warrant) and to impose fines on businesses found to have infringed competition law.

What are the risks of non-compliance?

The risks of being a party to an anti-competitive agreement or abusing a dominant position are serious. Potential consequences include:

• serious fines (up to 10% of a company's worldwide turnover);
• key provisions in agreements may become void and unenforceable (e.g. territory, restrictions, provisions relating to pricing/premiums). In some cases, the whole agreement may be ruled void;
• individuals directly involved in serious anti-competitive behaviour (e.g. price fixing cartels) face the threat of criminal prosecution, which could lead to imprisonment for a maximum of 5 years and/or unlimited fines;
• directors may be disqualified for up to 15 years;
• lengthy investigations by the competition authorities;
• business disruption and damage to corporate reputation from such investigations or subsequent litigation from customers, competitors and consumers.

Achieving compliance

In view of the severe consequences of non-compliance, businesses are advised to review their compliance with competition law. For bigger businesses it is vital to promote an understanding within the business of what is or is not allowed under competition law. One way to achieve this is by creating and actively implementing a competition compliance policy. Being pro-active in this way may be taken into account by the OFT in the event of an investigation and could lead to a reduction in any fines.