Competition law affects many areas of business activity, in particular commercial relationships with competitors, suppliers and distributors. This article looks at some common competition issues in commercial relationships and highlights the importance of complying with competition law.
What Is Competition Law?
Competition law (sometimes referred to as 'antitrust') is all about ensuring that there is sufficient competition in the market, so that prices stay low and companies stay efficient and continue to innovate. Within the UK there are two overlapping sets of competition rules: one domestic and one deriving from EU law. The EU competition rules apply throughout the European Union and in addition to promoting competition they contribute to the maintenance of a single market for goods and services.
How Might Competition Law Affect My Business?
Both day to day business and strategic activities may be affected by competition law, which:
- prohibits a number of types of restrictions in agreements;
- prohibits companies with a very strong market position from abusing that position;
- requires certain types of business transaction (mergers, acquisitions and some joint ventures) to be cleared by the competition authorities before they are put into effect; and
- forbids the government from giving favourable economic treatment to one company or industry to the exclusion of others (ie state aid).
The Prohibition On Anticompetitive Agreements
An agreement does not have to be in writing for competition law to apply – it may simply involve a 'gentlemen's agreement'. Decisions of trade associations may also be caught, as may any sort of arrangement where there is a 'meeting of minds' between the parties.
A range of different types of restrictions that may be found in a commercial agreement may fall foul of competition law. The agreement does not have to be between competitors for competition law to apply – in fact, competition law can apply equally to agreements between businesses at different levels of the supply chain. Any of the following may require close examination to check whether they are permissible: collaboration between competitors; exchange or pooling of sensitive information; controls on pricing; provisions granting territorial protection; exclusive supply or distribution arrangements; non-compete obligations; and selective distribution.
However, if a commercial agreement does contain such restrictions, all is not lost. In certain circumstances the agreement or the restriction may nonetheless be permitted under competition law, as it may be recognised that the benefits arising from the restriction outweigh the disadvantages of the reduction in competition.
Common Restrictions In Commercial Agreements
Three of the most common restrictions in commercial agreements are price controls, territorial restrictions and non-compete obligations.
Control Of Prices
Any agreement between competitors which fixes the price at which either or both/all of them sell their goods/services is the worst type of restriction of competition (known as a 'hard core' restriction). It is exceptionally rare for any such restriction to be permitted and usually this sort of restriction will attract the harshest penalties. Price fixing between competitors is the typical form of cartel activity and competition authorities across the world have as a priority the investigation and punishment of cartels.
When it comes to agreements between non-competitors, controls on pricing may not necessarily be viewed in such a negative light. In distribution agreements, the supplier will often seek to have some element of control over the prices charged by the distributor. However, any attempt by the supplier directly or indirectly to fix the prices at which the distributor resells the goods will not be permissible. So setting a recommended retail price is generally permitted but only if that recommendation is not, in reality, going to be enforced as a fixed retail price. The supplier may generally also impose a maximum retail price, but not a minimum retail price.
Territorial Restrictions
An agreement between competitors requiring each to stay out of the other's market (or to refrain from selling to the other's customers) is another type of hard core restriction. As with price fixing arrangements between competitors, this sort of restriction will usually attract severe penalties and will hardly ever be permissible.
In the context of agreements between parties operating at different levels of the supply chain (so called 'vertical' agreements), certain forms of territorial restriction may, however, be allowed. This is because certain restrictions mean that the parties' investments in the arrangements will be protected and so the restrictions actually encourage the parties to enter into the agreement. Although complete territorial restrictions, such as export bans, are not permitted, a supplier may be permitted to set up an exclusive distribution system. This involves the supplier allocating the exclusive right to sell into a particular territory to one distributor whilst reserving to himself or other exclusive distributors the right to sell into other territories.
If the supplier's market share is relatively modest (less than 30%), then a distribution system with territorial restructions will be permissible, provided that all distributors within the system are permitted to make passive sales into the territories reserved to other distributors. Passive sales are those made in response to a customer approaching the distributor without that approach having been solicited. In contrast, it is possible to restrict active sales. The use of the internet to advertise or sell products is generally considered to be a form of passive sale. Active sales are where the distributor actively seeks custom, for instance through advertising or directly contacting customers.
If the market share threshold is exceeded, it may still be possible to include some form of territorial restrictions; however this will require a detailed assessment of the proposed restriction to see if it gives rise to competition law concerns.
Non-Compete Obligations
In the context of a vertical agreement, a 'non-compete obligation' is one that:
- obliges one party not to manufacture, purchase, sell or resell goods or services which compete with the goods or services that are the subject of the agreement; or
- obliges a buyer to purchase from the supplier more than 80% of the buyer's total purchases of the relevant goods or services.
Non-compete obligations are often considered to be crucial in many commercial arrangements but as their name suggests, such obligations may well be caught by competition law.
The competition authorities recognise that these obligations may encourage businesses to enter into commercial arrangements because they give the parties some degree of reassurance that the business can be allowed to grow. This is balanced against the restriction on competition. Provided that the market share of the party imposing the restriction is modest (ie less than 30%), and provided that the restriction does not last for more than five years, it will generally be permitted under competition law. If, however, such an obligation is to last for an indefinite duration or for more than five years or is to be automatically renewed for an indefinite period, it will raise competition law concerns. The same will be true if the non-compete obligation lasts after the agreement to which it relates has terminated. Post-termination non-compete restrictions are only permitted in very limited circumstances.
Consequences Of Breaching Competition Law
The consequences of breaching competition law can be serious and far-reaching. They may include:
- fines of up to 10% of a business's worldwide turnover;
- criminal prosecution of individuals involved in hard core breaches of competition law;
- disqualification of individuals from acting as a director;
- unenforceability of the anti-competitive agreement; and
- third parties who have suffered loss as a result of the breach can sue for damages.
Recently, the level of fines imposed for breaching competition law has increased. In November 2008, the European Commission imposed it largest ever cartel fine of e1.384 billion on four companies in relation to the car glass cartel. In total, seven cartel decisions were issued by the Commission in 2008, with total fines of over e2.2 billion. National competition authorities also issue large fines for anti-competitive behaviour. In 2007, the OFT fined British Airways £121.5 million following the fuel surcharge cartel.
Key individuals involved in hardcore cartels may face criminal prosecution, with 2008 seeing the first criminal convictions in the UK when three individuals involved in the international marine hoses cartel were each imprisoned for terms of up to 30 months. Furthermore, the trial is expected next year of four current and former executives and managers of British Airways charged in respect of the fuel surcharge cartel.
An equally serious sanction is the fact that an anti-competitive agreement can be declared void and unenforceable. This may have far-reaching consequences for a company's commercial relationships with, for example, its suppliers and/or distributors.
There is also a growing number of private actions for damages brought by claimants alleging that they have suffered loss as a result of anti-competitive behaviour. Defending private damages actions can be costly, not only as a result of legal and other costs but also in terms of the potential damages that can be awarded. For example, the recent case brought against JJB Sports in respect of a price-fixing cartel involving the sale of football shirts saw the retailer agree to pay £20 to every purchaser of the relevant shirts. Competition authorities are keen to see an increase in third party competition litigation and are investigating ways to make it easier for claimants to launch such actions.
How Can I Protect My Business?
A key option for those seeking to protect their business against any claim that the business has been involved in a breach of competition law is to consider implementing a competition compliance programme. A robust programme with regular competition audits will help minimise the possibility of breaching competition law and limit the duration of any breach that does occur. Furthermore, if a breach of competition law is identified, the company will be in a position to manage its potential exposure, including the possibility of approaching competition authorities to seek immunity or leniency from sanctions. If a compliance programme indicates that a company has made a genuine attempt to comply with competition law, this may be a mitigating argument to put in order to apply for a reduction in any fine that may be imposed. A compliance programme may also highlight potential breaches of competition law by third parties which may enable a company to launch a claim for damages if loss has been suffered.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
