Competition law - the basics

Individuals could also find themselves facing director disqualification orders or even criminal prosecution for serious breaches of competition law.

Any business – whatever its legal status, size and sector – therefore needs to be aware of competition law, firstly so that it can meet its obligations, and in doing so, avoid heavy penalties, but also so that it can assert its own rights and protect its position in the marketplace.

Anti-competitive behaviour which may affect trade within the UK is prohibited by Chapters I and II of the Competition Act 1998. Where anti-competitive behaviour may affect trade between EU member states, it is also prohibited by Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). The EU rules will cease to have effect within the UK from 1 January 2021 but UK businesses with cross-border activities within the EU will still be subject to EU competition law in respect of those activities, as well as domestic competition law in the EU member states.

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

• anti-competitive agreements (under the Chapter I / Article 101 prohibitions); and
• abuse of a dominant market position (under the Chapter II / Article 102 prohibitions).

Anti-competitive agreements (Chapter I / Article 101)

Both UK and EU competition law prohibit agreements, arrangements and concerted business practices which appreciably prevent, restrict or distort competition, or where this is the intended result, and which affect or may affect trade within the UK or the EU respectively.

Consequences of breach

Infringements of Chapter I or Article 101 can have serious consequences for a business:

• firms engaged in activities can face fines of up to 10% of group global turnover;
• anti-competitive restrictions in agreements may be automatically void and unenforceable, and may lead to the entire agreement being unenforceable;
• firms also leave themselves exposed to actions for damages from consumers, customers and competitors – including mass actions – who can show they have been harmed by the anti-competitive behaviour; and
• individuals in the UK can face being disqualified from acting as company directors as well as risk prosecution under the criminal cartel offence.

Types of agreement within scope

Whether an arrangement is anti-competitive is assessed on the basis of its objective, or its effect on competition, rather than its wording or form. This means that verbal and informal 'gentlemen's agreements' are equally capable of being found to be anti-competitive as formal, written agreements.

Examples of the types of arrangement which are generally prohibited under Chapter I and Article 101 include:

• agreements which directly or indirectly fix purchase or selling prices, or any other trading conditions, for example, discounts or rebates, etc.;
• agreements which limit or control production, markets, technical development or investment, for example, setting quotas or levels of output;
• agreements which share markets or sources of supply; and
• agreements which apply dissimilar conditions to similar transactions, placing other trading parties at a disadvantage.

Agreements between companies in the same corporate group will not be caught by the prohibitions.

Cartels

Cartel behaviour between competitors is the most serious form of anti-competitive behaviour under Chapter I or Article 101 and carries the highest level of penalties. A 'hardcore' cartel is one which involves price-fixing, market sharing, bid rigging or limiting the supply or production of goods or services. Individuals prosecuted for a UK cartel offence may be liable to imprisonment for up to five years and/or the imposition of unlimited fines. 

In addition, individuals involved in international cartels, such as those involving activities in the US, could also face extradition and criminal prosecution under applicable national competition laws.

Exemptions

The fact that an agreement restricts competition does not mean that it is automatically prohibited, unless it is a hardcore cartel. It may be that an agreement which falls within the scope of the prohibitions under Chapter I or Article 101 is excluded or exempted from the competition rules.

For example, an agreement which would otherwise be caught by Chapter 1 or Article 101 may be assumed to be harmless where the parties to it are not actual or potential competitors, or they have market shares sufficiently low that there can be no real effect on competition or trade within the UK or between EU member states. However, agreements which are deemed to restrict by object, in particular, cartel behaviour, will almost always be found to infringe the competition rules regardless of market shares.

Other agreements may be exempted under a 'block exemption' – a group exemption, which automatically exempts certain agreements falling within its scope. Different block exemptions may apply depending on the nature of the agreement or the market sector concerned. For example, there are block exemptions available for vertical agreements, technology transfer agreements and research and development agreements

Each sets out certain conditions which must be satisfied in order for the agreement to be block exempted. These conditions might include, for example, those relating to the market shares of the parties and the types of restriction contained within the agreement. A number of EU block exemptions have been carried across, with some minor modifications, into UK domestic law and will continue to apply under UK competition law after Brexit.

Even if an agreement does not fit squarely within a block exemption, it is still not automatically unlawful or unenforceable. An agreement may also be individually exempted on the grounds that the restrictions of competition are outweighed by its beneficial effects. The evidential burden for satisfying the requirements for individual exemption is fairly high and it is incumbent on businesses to ensure that they self-assess their compliance with the competition rules; it is not possible to apply for clearance from the competition authorities, except in very limited circumstances.

Abuse of a dominant market position (Chapter II / Article 102 prohibition)

Both UK and EU competition law prohibit businesses with market power from unfairly exploiting their strong market positions, known as an "abuse" of dominance. However, having a dominant position does not in itself breach competition law. It is only the abuse of that position that is prohibited.

Consequences of breach

Breaching Chapter II or Article 102 can have serious consequences for a business:

• firms that abuse their dominant position can face fines of up to 10% of group global turnover;
• conduct in breach of Chapter II or Article 102 can be stopped by court injunction;
• firms in breach of Chapter II or Article 102 also leave themselves exposed to actions from third parties who can show they have suffered loss as a result of the anti-competitive behaviour; and
• breach of Chapter II can result in individuals being disqualified from being a company director.

Type of behaviour within scope

To be in a position of dominance, a business must have the ability to act independently of its customers, competitors and consumers. Establishing if a company is dominant requires a complex economic and legal assessment of a number of elements but, as a general rule, if a business has a 50% market share or greater there is a presumption that it is dominant. However, dominance has been found to exist where market share is as low as 40%.

Article 102 requires dominance in a substantial part of the EU, but there is no requirement under Chapter II that a dominant position must be held in a substantial part of the UK, meaning that, in theory at least, dominance could be considered to exist in a fairly small geographical area of the UK.

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

• imposing unfair trading terms, such as exclusivity;
• excessive, predatory or discriminatory pricing;
• refusal to supply or provide access to essential facilities; and
• tying – i.e. stipulating that a buyer wishing to purchase one product must also purchase all or some of their requirements for a second product from the dominant supplier.

Exemptions

There is no equivalent to the exemption for anti-competitive agreements. However, a dominant company may be able to show that it has an objective justification for otherwise abusive behaviour in certain circumstances.

For example, a company may refuse to supply to a particular customer based on its poor credit rating, which would amount to the protection of legitimate business interests and not, therefore, constitute abusive conduct under Chapter II or Article 102. It would only be when such behaviour goes beyond what is necessary to protect the business' interests that this could amount to an abuse.

Enforcement of competition law

EU competition law no longer applies in the UK after 31 December 2020 and the UK competition authority and courts will no longer apply it. However, EU competition law in force before that date, including the European courts' historic case law, will continue to apply in the UK as "retained EU law". This means that UK competition law will continue to be interpreted in accordance with pre-Brexit EU law and case law. However, going forward, some UK courts will be able to depart from retained EU law in certain circumstances.

The Competition and Markets Authority (CMA) is the principal competition law enforcement authority in the UK, though there are a number of sector regulators with concurrent powers to enforce competition law in their respective sectors. These include the FCA for the financial services sector, Ofgem for the electricity sector and Ofwat for the water sector.

The CMA and sector regulators have significant powers to investigate suspected anti-competitive behaviour. Those powers can be used to enter and search business and private premises with a warrant in what is known as "dawn raids". They also have the power to impose fines on businesses found to have infringed competition law .Criminal sanctions for the most serious breaches of competition law are prosecuted by the CMA together with the UK's Serious Fraud Office.

Achieving compliance

The risks associated with being a party to an anti-competitive agreement or abusing a dominant position are serious. In addition to the consequences listed above, a further risk for businesses is the disruption and damage to a company's reputation which arise from lengthy investigations or subsequent litigation from customers, competitors and consumers, and significant legal costs and management time.

In view of the severe consequences of non-compliance, businesses should regularly review whether the company's practices and agreements comply with competition law. For any company, and especially any company with a significant share of the markets in which it operates, it is vitally important to promote an understanding amongst employees as to what type of behaviour is and is not permissible under competition law.

One practical way to promote an understanding of competition law amongst employees is for a company to devise and actively implement a competition compliance policy and programme that is specifically tailored to that company, together with training of staff and other procedures to manage and mitigate risk. Not only does this minimise the risk of being non-compliant in the first place, but if a company is investigated for anti-competitive behaviour, evidence of a competition compliance policy may be taken into account by the CMA or the European Commission and could lead to a reduction in fine.