Whether your UK business is a start-up, a third-generation family business, or a subsidiary of an overseas company you need to understand the basics of UK competition law and how engaging in anti-competitive behaviour could affect your business.
This article provides a general overview of UK competition law and offers some practical tips. Our commercial law specialists can provide expert guidance on how competition law could affect your business practices and commercial contracts, or help if you are facing a competition investigation.
- What is competition law?
- What are anti-competitive agreements?
- What is a cartel?
- What is the role of the CMA?
- Penalties for not complying with UK competition law
- Practical tips for UK business owners on competition law
What is competition law?
UK competition law is designed to stop anti-competitive behaviour consisting of:
- Anti-competitive agreements
- Abuse of a dominant market position
Competition law is contained in Chapters I and II of the Competition Act 1998 and is policed by the Competition Markets Authority (CMA).
UK competition law is designed to protect the ‘underdog’ consumer or business from anti-competitive agreements or abuse of dominant market positions. If your business is a market leader, you cannot afford to ignore competition law because of the significant penalties for non-compliance. If your business trades internationally, you also need to be aware of the domestic competition law in the country where you are trading and the EU competition law contained in Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). For example, if your company faces a cartel investigation it could be subject to CMA and Article 101 investigations if the alleged anti-competitive conduct took place in the UK and an EU member state.
What are anti-competitive agreements?
Anti-competitive agreements are arrangements or concerted business practices which appreciably prevent, restrict, or distort competition. The law also covers agreements where this was the intended result.
Anti-competitive agreements can be subtle and include what the CMA refers to as ‘concerted practices’ between companies. Concerted practices are agreements that may affect trade within the UK and which have as their object, or effect, the prevention, restriction, or distortion of UK competition.
An anti-competitive agreement is one that:
- Directly or indirectly fixes the purchase or selling price of goods or services
- Controls or limits markets, technical development, production, or investment
- Share markets or sources of supply
- Applies different conditions to equivalent transactions with other trading parties so the trading party is placed at a competitive disadvantage
- Imposes the acceptance of unrelated obligations as a condition of contracting
Can an anti-competitive agreement be made verbally?
Chapter I of the 1998 Act applies to oral agreements and informal collusion by a ‘nod and wink.’
Unofficial chats to exchange commercially sensitive information to help exclude a trader or to limit consumer choice can amount to an anti-competitive agreement even if there is no paperwork or the agreement does not actually affect competition. The key points to consider are whether the agreement was:
- Intended to have an anti-competitive effect even if the loosely described agreement was not acted on or
- Entered without intending to be an anti-competitive agreement but the effect of the agreement is appreciably anti-competitive
What types of agreements can be anti-competitive?
Business owners typically think of an anti-competitive agreement as an organised cartel but many different types of commercial contracts can fall within the definition of an anti-competitive agreement. For example:
- Vertical agreements made between businesses at different levels of the supply chain. A vertical agreement is one that has an appreciable effect on competition if the total combined market shares of the parties are at least 15%
- Horizontal agreements between competing businesses at the same level. A horizontal agreement is one that has an appreciable effect on competition if the total combined market shares of the parties are at least 10%
Find more information in our article explaining vertical and horizontal agreements.
What is a cartel?
A cartel is an anti-competitive agreement carrying out a prohibited cartel activity:
- Direct or indirect fixing of prices
- Limiting supply or production
- Sharing customers or markets
A cartel is the most serious and organised form of anti-competitive agreement. That’s why the CMA distinguishes between cartels and anti-competitive agreements when it comes to penalties for breach of competition law.
Understanding what tips an anti-competitive agreement into a cartel is important because an individual engaging in a cartel may commit an offence under the Enterprise Act 2002. Penalties include imprisonment for up to five years and a confiscation order. A company director can be disqualified for up to 15 years.
What is the effect of an anti-competitive clause in an agreement?
Some business owners assume that if a clause in an agreement is found to be ‘anti-competitive’ the clause is invalid but the rest of the commercial contract will stand. That isn’t necessarily the case.
An anti-competitive clause in an agreement can make the entire contract unenforceable. That can set off a chain reaction with commercial contract disputes, protracted and expensive commercial litigation as well as claims from consumers and competitors. The company’s reputation could also be placed at risk through adverse publicity.
Permitted anti-competitive agreements
Some types of anti-competitive practice are permitted provided the beneficial effects of the anti-competitive activity or agreement outweigh the anti-competitive effect. However, when it comes to cartels and prohibited cartel activity, there is no defence based on permitted practices.
Frustratingly for business owners, you can't usually get an advance ticket from the CMA to say that your agreement falls within permitted activities. That’s why if you have any doubts about a collaborative agreement, it is best to get a commercial solicitor to check it out.
The agreement may be exempt if it contributes to improving the production or distribution of goods or promotes technical or economic progress. However, the agreement needs to allow consumers a fair share of the benefit. Also, the agreement can't impose any restrictions that are not indispensable to the attainment of the objectives or eliminate competition for a substantial part of the goods.
Abuse of a dominant market position
Abuse of a dominant market position is contrary to Chapter II of the 1998 Act. Understanding the difference between the power of a market leader and abuse is critical as a company that abuses its dominant market position could face fines of up to 10% of group global turnover as well as injunction proceedings and civil litigation.
If your company has a market share of 40% or above, it could be in a position of dominance if it can act independently of its customers, competitors, and consumers. That is no bad thing provided abuse doesn’t occur.
Examples of competition abuse include:
- Imposing unfair trading terms such as an exclusive purchase requirement
- Tying in purchases of services or goods so a tech retailer must purchase all last year’s range of tech equipment if it wants to be able to purchase the latest gadget
To assess market abuse, the CMA considers the requirements of the dominant market leader and surrounding circumstances. For example, a refusal to trade may not be anti-competitive if the market leader does not want to do business with a company with a poor credit rating.
What is the role of the CMA?
The Competition and Markets Authority (CMA) is the competition authority in the UK. It enforces UK competition law and issues guidance on anti-competitive and abusive practices.
The CMA investigates potentially anti-competitive or abusive practices on its own initiative or after receiving a complaint using broad investigative and enforcement powers.
The CMA can accept binding commitments or approve voluntary redress for competition law breaches.
A binding commitment allows a company to voluntarily offer to resolve the competition issues without admitting an infringement. Voluntary redress allows a firm to compensate those who have suffered loss as a result of anti-competitive behaviour. At the first sign of CMA involvement, it is essential to get legal advice and guidance on how to work with the CMA.
Penalties for not complying with UK competition law
The penalties for noncompliance with UK competition law are enough to make any company or individual director wince. They include:
- An agreement can be found to be unenforceable, exposing the company to financial loss and damages claims
- A fine of up to 10% of group global turnover in the last financial year
- On an individual basis, company directors could face criminal prosecution and director disqualification through a competition disqualification order
Competition law is not something that company boards or individual directors can afford to be cavalier about.
Practical tips for UK business owners on competition law
Commercial solicitors say it’s essential to minimise the risk of your company falling foul of competition law. Senior employees can't avoid anti-competitive practices if they don’t have a broad understanding of the rules. That’s why our competition lawyers recommend:
- Creating a competition compliance risk management policy and monitoring it. Even if the policy is breached the fact that your business developed a policy can be used in mitigation if a referral is made to the CMA. Don’t assume that your business is too small to worry about breaching competition law.
- A training programme for staff so they understand the basics of competition law, how to internally report concerns, and the disciplinary consequences of breaching company policy.
- Ensure employees understand the limits of their roles and what amounts to commercially sensitive information that should not be discussed with competitors when attending industry conferences or trade association meetings.
- Make sure current and new company directors understand their personal liability and the potential for a competition disqualification order being made against them. Provide adequate training commensurate to the director’s role and responsibility.
- Understand sector-specific risks. For example, gas and telecommunications have their own regulators who work together with the CMA to ensure competition law is adhered to. Identify high-risk areas in your industry or sector, such as joint tenders, and allocate risk management resources to the high-risk areas.
- Review agreements involving collaboration with third parties such as joint venture or agency agreements, tenders, or research and development agreements before the contracts are signed off.
- Think twice. Ideas to carve out markets or to discuss price increases may sound a brilliant idea in tough market conditions but they may amount to collusion.
- Look at contract life cycle management and don’t forget to review competition issues. For example, your company's market share may have increased to a dominant position or the guidance on anti-competitive agreements may have changed. Take a look at our article on Contract lifecycle management: what you should be doing.
- Take competition law legal advice if you aren’t sure about what amounts to good business practice (for example, exclusivity provisions in high-end retail or tech) before committing your company to an anti-competitive agreement. If a complaint is made to the CMA, or there is a threat of commercial litigation by a third party, take urgent advice. With the right advice, you may be able to resolve the CMA referral quickly and avoid potential litigation by using alternative dispute resolution (ADR).
- If your company is scaling up into new EU or non-EEA markets check current EU or domestic anti-competitive legislation to ensure your UK policies are consistent and compliant with the country in which you will be trading.