UK: Globalisation At Work? The UK Competition Act 1998

This paper, prepared by Jane Whittaker of Macfarlanes Competition and EC Unit, examines the key features of the new EC look-a-like anti-trust regime which came into effect in the UK in March 2000.

The Millennium may finally see some significant steps towards globalisation, or at least an emerging broader consensus, among national regulators as to the priorities for anti-trust enforcement.

In many European countries, in recent years, domestic regimes encompassing control over mergers, anti-competitive agreements and monopolistic behaviour have been introduced mirroring the three pillars of the EU anti-trust regime, the Merger Regulation (amended in March 1998), Article 81 (restrictive agreements) and Article 82 (abuse of dominance) formerly known as Articles 85 and 86. Even the laissez-faire Dutch have been persuaded to introduce merger controls!

In the UK, debate has been conducted for over 10 years on replacing the outmoded and formalistic restrictive trade practices legislation with a domestic regime mirroring Articles 81 and 82. Finally, last year, the Competition Act 1998 (henceforward "the Act") was enacted. Its main provisions will be brought into force, on 1 March 2000. An explicit, and laudable, objective was to lessen the burden of regulation on business in the UK by harmonising the UK anti-trust regime with that at the EU level.

The Act makes the most radical substantive, procedural and institutional changes to the UK anti-trust regime since the introduction of the original restrictive trade practices legislation over 40 years ago. The Act:

• repeals:

1. the restrictive trade practices legislation;
2. the prohibitions on collective and individual resale price maintenance;
3. the controls on single-firm anti-competitive practices in the Competition Act 1980;

• replaces them with domestic versions of Articles 81 and 82 of the EC Treaty prohibiting:

1. agreements between undertakings, decisions by associations of undertakings or concerted practices which affect trade within any part of the UK and have the object or effect of preventing, restricting or distorting competition within the UK;
2. conduct by one or more undertakings which amounts to an abuse of a dominant position affecting trade within the UK;

• strengthens the investigative and enforcement armoury of the Director General of Fair Trading (DGFT), in particular by empowering the Office of Fair Trading (OFT) to carry out 'dawn raids' and to impose fines of up to 10 per cent of the UK turnover of the infringing company;
• abolishes the Monopolies and Mergers Commission and replaces it with a Competition Commission;
• creates an entirely new appellate jurisdiction exerciseable by new appeal tribunals within the Competition Commission to review decisions of the DGFT under the Act.

The Government intends the new legislation to mirror the substantive provisions of EC competition law. This is achieved in three main ways:

1. The wording of the prohibition on restrictive agreements, the criteria for exemption from that prohibition and the prohibition on abuse of a dominant position replicate the corresponding provisions in Articles 81(1), 81(3) and 82 of the EC Treaty.
2. Agreements which benefit from individual or block exemption under Article 81, or which would benefit from block exemption if they affected trade between Member States, are automatically exempt from the national prohibition on restrictive agreements - under the concept of "parallel exemptions" introduced in the Act.
3. By the introduction of a general principle that questions arising under the Act are to be handled in a way "which is consistent with the treatment of corresponding questions arising in Community law" (Section 60). This principle applies to the DGFT and other regulators when applying the Act and to courts (including the appeal tribunal of the Competition Commission).

Section 2 of the Act prohibits agreements between undertakings, decisions by associations of undertakings or concerted practices which may affect trade within the UK and have as their object or effect the prevention, restriction or distortion of competition within the UK. This prohibition (referred to as the "Chapter I prohibition") replaces the old restrictive trade practices legislation, which, despite its name, applied only to agreements and arrangements and not concerted practices or single firm behaviour.

It is sufficient if the effect on trade and competition is felt within any part of the UK, but if an agreement, decision or practice is, or is intended to be implemented only outside the UK the prohibition will not apply. The prohibition has a strictly territorial ambit and so, unlike the legislation it replaces, has no application at all to so-called "export cartels". Anti-trust enforcement, like charity, begins (and still often ends) at home - a challenge to true globalisation.

Section 2 does not expressly require the effect on competition to be significant but, since the prohibition is to be interpreted in line with principles and decisions relating to Article 81, an appreciability test is implicit. Any agreement or decision infringing the prohibition is void. Again, this provision is likely to be interpreted in line with Article 81(2), with a result that an agreement or decision will be void only insofar as it has anti-competitive effects, with the consequential effect of that illegality on the agreement as a whole being determined by the contract rules applicable to the agreement in question.

Section 2(2) mirrors Article 81 and likewise singles out for mention as prohibited conduct which -

• directly or indirectly fixes purchase or selling prices or any other trading condition;
• limits or controls production, markets, technical development or investment;
• shares markets or sources of supply;
• applies dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
• makes the conclusion of contracts subject to acceptance by the other parties or supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

There will be two distinct types of notification in relation to the Chapter I prohibition, notification for guidance as to the DGFT's views on an agreement, decision or concerted practice, or notification to obtain a formal clearance or an exemption.

There is no process at the EC level similar to the concept of notification for guidance although the result is not unlike the issue of a comfort letter by DGIV. The benefits of such a notification are that, if the DGFT offers guidance that the notified conduct is unlikely to infringe, will fall within a block exemption or satisfies the individual exemption criteria, then, although his advice is not binding, he may take no further action unless false information has been given in the notification, there is a material change of circumstances, a party applies for a formal decision, or a complaint is made. Moreover an agreement on which the DGFT has given guidance is immune from penalties until the DGFT withdraws the immunity or takes further action in respect of the agreement.

The Act provides for several different types of exemption from the general prohibition in Section 2. Exemptions may be individual, parallel or block exemptions.

The criteria for individual exemptions are identical to those recognised in Article 81(3) of the EC Treaty. The notified agreement, decision or practice must contribute to improving production or distribution, or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit but must not impose on the parties concerned restrictions which are not indispensable to achieving those objectives or afford them the possibility of eliminating competition in respect of a substantial part of the products in question.

The concept of "parallel exemptions" is introduced in the Act to create automatic exemptions from the Chapter I prohibition where an agreement benefits from an individual or block EC exemption. Parallel exemptions are also available in respect of agreements which are not subject to Article 81 simply because they do not have the requisite effect on trade between Member States but would be exempt at the EC level if they did have that effect.

Block exemptions under the Act will usually be made by statutory order by the Secretary of State, on the recommendation of the DGFT. It will not, however, be necessary for the UK to replicate all the EC block exemptions because these will automatically have effect as parallel exemptions.

US anti-trust lawyers have long been non-plussed by the absence of a rule of reason for vertical agreements in EC law and the UK authorities, though modelling their regime on the EC Treaty, are proposing to mitigate the "catch-all" effect of the new domestic version of Article 81 by introducing a very wide exclusion for vertical agreements provided they do not involve the setting of fixed or minimum resale prices. The UK is not constrained by the EC's inability, absent Treaty amendment, to exclude agreements from Article 81(1). The final form of the exclusion for vertical agreements has not been finally settled. Unlike the proposed EC block exemption the UK exclusion will not, however, be dependent upon any market share thresholds but the Director General of Fair Trading will have a wide discretion to withdraw the exclusion from particular agreements. Normally it will be complaints to the DGFT which trigger a use of this power.

Alongside the Chapter I prohibition, the Act introduces a new prohibition on conduct constituting the abuse of a dominant position affecting trade in the UK. This is a domestic version of Article 82 and the language of the prohibition again deliberately mirrors that of Article 82.

The prohibition in Chapter II replaces the controls over anti-competitive practices by individual firms introduced in the Competition Act 1980. In fact, however, the two sets of provisions have little in common. Formal action under the 1980 Act, which had long become a dead letter, was not strictly dependent on a firm enjoying market power, let alone a dominant position.

As with Article 82, there is no power to exempt or approve conduct which amounts to an abuse of a dominant position. To some extent, however, the concerns expressed about the major widespread uncertainty which would follow the introduction of an abuse of dominant position prohibition into the UK's domestic competition law may be mitigated by the ability to notify conduct to the DGFT for guidance, although it remains to be seen whether this will be regarded by most companies as an attractive option - it smacks rather of putting one's head into the lion's mouth, and similar, albeit formal, notifications to the European Commission for negative clearance from the Article 82 prohibition are virtually unheard of.

Save for the absence of any exempting power, notification provisions for guidance and decisions of clearance in relation to the Chapter II prohibition correspond to those available in relation to agreements, decisions and concerted practices under the Chapter 1 prohibition.

The sanctions which apply to infringements of the prohibitions in the Act are broadly similar to those applicable at the EC level to infringements of Articles 81 and 82. They include:

• voidness for breaches of the Chapter I prohibition;
• directions by the DGFT requiring the termination or modification of infringing behaviour;
• liability to third parties;
• fines up to 10 per cent of annual turnover; and
• interim measures.

The original consultation version of the Competition Bill specifically provided that only the infringing provision of an agreement or decision would be rendered void by the Chapter I prohibition. There is, however, no explicit provision to that effect in Section 2(4) of the Act, which now precisely replicates Article 81(2) of the EC Treaty. Thus it will be for the Courts in the UK to determine the precise effect in any particular case of voidness, but in the light of relevant EC jurisprudence.

The DGFT may issue directions to parties infringing the Chapter I or Chapter II prohibitions, requiring them to terminate or modify the agreement or conduct in question. Any such direction must be given in writing after a formal decision that the agreement or conduct in question infringes the Act. The DGFT may obtain court orders requiring compliance with his directions, and a breach of such an order will constitute contempt of court.

The extent of liability to third parties for infringing the domestic versions of Articles 81 and 82 is unclear. Originally, the draft Bill published for consultation provided for actions by third parties only following the failure of a party to comply with a direction from the DGFT. This provision was subsequently abandoned and the Act now contains no provision specifically dealing with rights and remedies available to third parties or the circumstances in which they will become available. Since the domestic versions of Articles 81 and 82 are not Community rights it will not be necessary for Courts in the UK, as a matter of Community law, to guarantee effective remedies for their enforcement by third parties deriving rights from a breach of the EC competition rules. Nonetheless, if the view is that Articles 81 and 82 create rights of action for breach of statutory duty there seems no reason why similar rights should not be derived from the Chapter I and II prohibitions.

Unlike in the US, private litigation based on breaches of UK (and, for that matter, EC) anti-trust law is still comparatively rare in the UK. Governments and regulators in the EU flirt with encouraging private litigation from time to time but largely, one senses, in an effort to shift the burden of enforcement from public resources and the public purse to private litigants.

Once a formal decision has been made of infringement by the DGFT a penalty up to a maximum fine of 10 per cent of the annual turnover of the infringing undertaking may be imposed by the DGFT. That maximum may be varied by order by the Secretary of State. A fine may only be imposed for an intentional or negligent infringement. Moreover, if the DGFT is satisfied that a company reasonably assumed its agreement or conduct to be insignificant he may not impose a fine.

Prior to the Act, the UK competition authorities had very limited powers to apply for interim measures since UK law contained very few per se prohibitions. The only express power of this kind was contained in the restrictive trade practices legislation but the conditions which had to be satisfied before an interim order could be made by the Court meant that their use was very rare indeed.

The Act widens the power considerably. It is no longer necessary for the DGFT to apply to the Court. He may himself now issue an interim direction, while his investigation proceeds, on reasonable suspicion that the Act has been infringed, provided that he considers it necessary to do so as a matter of urgency for the purpose (a) of preventing serious, irreparable damage to a particular person or category of person, or (b) of protecting the public interest. This new power, therefore, reflects the Commission's power to apply interim measures as recognised originally by the European Court of Justice in the Ford case.

The DGFT is given new powers of investigation to match the new prohibitions on anti-competitive agreements and concerted practices and abuse of dominant position. These powers too are modelled closely on the powers of the European Commission under Regulation 17/62 but are not completely identical.

Notably, the DGFT is given a power to enter domestic premises if (a) they are also used in connection with the affairs of an undertaking; or (b) documents relating to the affairs of an undertaking are kept there. The fact that the managing director of a company has a study in his/her home where he/she may work on company matters probably does not mean that the home is used in connection with the affairs of an undertaking (though the contrary is arguable) but if company documents are kept there the home would be liable to entry by virtue of (b) above. Moreover, since "document" is defined in Section 59 to include "information recorded in any form" if the director kept company data on a home computer "documents relating to the affairs of an undertaking" would be kept on domestic premises and they would be susceptible to entry by the DGFT. However, though domestic premises may be entered by the DGFT pursuant to his investigatory powers they are not occupied by the infringing undertaking itself and therefore the minimum 2 day notice period would apply pursuant to Section 27(2) of the CA 1998. Under EC law, an individual may be an undertaking (Vaessen Morris) and if the individual ran a business from home the home would be occupied by an undertaking and notice would not be required. Generally, however, EC officials have no power to enter domestic premises (confirmed in Dow Chemical).

Where, however, officials of the OFT are assisting DGIV officials in EC investigations they are given the powers which the European Commission has under Regulation 17/62. The only impact of the new regime in this area is to put on a statutory basis the procedures which have been used in practice to enforce Commission decisions to mount dawn raids.

Assimilating the powers of the DGFT more closely with those of the European Commission is an overdue development, particularly since OFT officials almost invariably accompany DGIV investigators and indeed recently have carried out raids on behalf of DGIV without the presence of any EC officials.

Information obtained by the DGFT pursuant to his new powers is protected by confidentiality but the DGFT is free to disclose information to the European Commission to facilitate its functions under EC competition law, as he is to other UK regulators dealing with the utilities sector. There is no similar power to disclose information to other competition authorities, whether in the US or in individual Member States of the European Union.

The decision of the UK government finally to introduce domestic equivalents of Article 81 and 82 represents a significant step in convergence of domestic anti-trust regimes not only in the European Union but also in Central and Eastern Europe where a domestic regime compatible with the EC Treaty rules is seen as a pre-condition of future membership of the Union. It remains the case, however, that only a bare minority of EU Member States (not including the UK) have given their competition authorities the general power to apply the EC competition rules themselves (in addition to their domestic equivalents). In part, this reluctance is due to the inability of any authority other than the European Commission to grant exemptions under Article 81(3) and the Commission expects to publish proposals in the near future for amendments to Regulation 17/62 which might surrender this monopoly or share it with Member States in certain circumstances. But, in part also, the reluctance also stems from a concern that the cause of convergence and consistent application of competition law will not be served by encouraging enforcement by the competition authorities in the Member States as opposed to the Commission in Brussels.

Nonetheless, on the broader, global scale there are clear signs both in merger controls and in the approach to vertical agreements and restraints that dialogue between the US and the EU is helping to create not only more consistency in the application of the anti-trust rules but also the removal of some of the more glaring disparities between their respective regimes.

The challenge of international companies, and their advisers, is to organise their anti-trust compliance arrangements (including the collection and retention of company and market data) to enable both global and regional anti-trust issues to be handled consistently, efficiently and timeously.

© MACFARLANES January 2000

This note is intended to provide general information about some recent and anticipated developments as of the date at the head of this note, which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice. It will not necessarily be updated and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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