With communication getting faster, markets are becoming increasingly competitive and relationships between businesses ever more important. Competition law reduces the risk of unfair competitive practices to protect consumers and businesses but also places businesses and individuals at risk if they don’t understand the basics of competition law and the penalties for non-compliance.
This article will provide you with a general overview of UK competition law and offers some practical tips for your business to consider. If you'd like tailored advice on how you can reduce your chances of falling foul of competition law or your position if you are found to be in breach, our commercial law specialists can provide expert guidance.
- What is competition law?
- What does UK competition law protect against?
- What is the Competition and Markets Authority?
- Penalties for not complying with UK competition law
- What are anti-competitive agreements?
- Can an anti-competitive agreement be made verbally?
- What types of agreement can be anti-competitive?
- What is a cartel?
- What is the effect of an anti-competitive clause in an agreement?
- Permitted anti-competitive agreements
- Abuse of a dominant market position
- Practical tips on competition law
What is competition law?
UK competition law is contained in Chapters I and II of the Competition Act 1998 and is policed by the Competition Markets Authority (CMA).
If your business is involved in international trade, you also need to be aware of:
- The basics of the domestic competition law in the country where you are trading and
- EU competition law contained in Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU)
Prior to Brexit, a breach of EU competition law was enforceable by the CMA . After the end of the Brexit transition period, EU competition law ceased to apply to the UK. Under section 60A Competition Act, the CMA and UK courts must continue to interpret UK competition law in line with EU law and case law as at the 31 December 2020 and have regard to guidance and future EU case law, although they are not bound by it.
For businesses that trade overseas it’s important to ensure compliance with the relevant UK, EU and domestic competition laws. For example, if a company faces a cartel investigation it could be subject to CMA and Article 101 investigations depending on the location of the alleged anti-competitive conduct.
What does UK competition law protect against?
Competition law is designed to stop two main activities:
- Anti-competitive agreements
- Abuse of a dominant market position
Competition law protects consumers and businesses from unfair, abusive and anti-competitive practices by providing access to competitive markets resulting in businesses having equal rights in, and access to, the market and consumers being provided with increased choice at fair cost.
With the right commercial solicitors on your side, a start-up or scale-up can get competition law to work for them as the law is designed to protect the ‘underdog’ from anti-competitive agreements or abuse of dominant market positions. Equally, as your business becomes a market leader, you can't afford to ignore competition law because of the significant penalties for non-compliance.
What is the Competition and Markets Authority?
The Competition and Markets Authority (CMA) is the competition authority in the UK, which 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. The CMA has broad investigative and enforcement powers.
The CMA can accept binding commitments or approve voluntary redress for competition law breaches. A binding commitment enables a company to voluntarily offer to address the competition issues raised without agreeing that there has been an infringement. Voluntary redress allows a firm to compensate those who have suffered loss as a result of anti-competitive behaviour. Commercial solicitors emphasise that at the first sign of any CMA input it is essential to get expert legal advice and to work with the CMA.
Penalties for not complying with UK competition law
The penalties for not complying with UK competition law are enough to make any company or individual director wince as they include:
- An agreement can be found to be unenforceable, exposing the company to financial loss and a potential damages claim
- The company being fined up to 10% of group global turnover in the last financial year
- On an individual basis, company directors could face criminal prosecution and disqualification as a director by the making of a competition disqualification order
Competition law is not something that either company boards or individual directors can afford to be cavalier about. Proactive commercial lawyers recommend that every company puts in place policies and procedures to minimise the risk of a significant breach of the 1998 Act or any relevant EU or domestic law.
What are anti-competitive agreements?
Anti-competitive agreements are covered by Chapter I of the 1998 Act in UK law and Article 101 of EU law. UK and EU law prohibit agreements, arrangements and concerted business practices which appreciably prevent, restrict or distort competition, or where this is the intended result.
Most businesses would recognise an organised cartel as an anti-competitive agreement but UK competition law prohibits all types of anti-competitive agreement, including what the CMA refers to as ‘concerted practices’ between companies. Cartels are at the top end of prohibited activities and attract stronger penalties but anti-competitive agreements capture any concerted practices that may affect trade within the UK and which have as their object ,or effect, the prevention, restriction or distortion of competition in the UK.
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?
A business can't escape the attention of the CMA by entering into verbal anti-competitive agreements or through informal collusion by a ‘nod and wink’.
Chapter I of the 1998 Act applies to oral agreements and understandings. 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 and even if the agreement doesn’t actually affect competition. The key is whether the agreement was either:
- Intended to have an anti-competitive effect even if the loosely described agreement was not acted on or
- Entered into without intending to be an anti-competitive agreement but the effect of the agreement is appreciably anti-competitive
What types of agreement can be anti-competitive?
You typically think of an anti-competitive agreement as an organised cartel but many different types of commercial contract can fall within the definition of an anti-competitive agreement including:
- Vertical agreements made between businesses at different levels of the supply chain. Unless the agreement is a cartel, a vertical agreement is one that has an appreciable effect on competition if the total combined market shares of the parties is at least 15%.
- Horizontal agreements between competing businesses at the same level. Unless the agreement falls into the definition of a cartel, a horizontal agreement is one that has an appreciable effect on competition if the total combined market shares of the parties is at least 10%
What is a cartel?
A cartel is the most serious and organised form of anti-competitive agreement. Accordingly, the CMA distinguishes between cartels and anti-competitive agreements when it comes to penalties for breach of competition law. A cartel is an anti-competitive agreement that is carrying out a prohibited cartel activity:
- Direct or indirect fixing of prices
- Limiting supply or production
- Sharing customers or markets
Cartels fall within criminal law. To be convicted of a criminal offence an individual has to have acted dishonestly if the cartel was entered into before the 1 April 2014. It is not necessary to prove dishonest intent if the cartel was formed after that date.
Understanding what tips an anti-competitive agreement into a cartel is important because if an individual engages in a cartel, they 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 will be invalid but the rest of the commercial contract will stand. That isn’t necessarily the case.
Anti-competitive clauses in agreements may be automatically void but they can also lead to the entire contract being unenforceable. That can have profound consequences for a company as a chain reaction could set in with commercial contract disputes, protracted and expensive commercial litigation as well as claims from consumers and competitors. As well as facing claims for damages a company could also be looking at being tied up in time consuming and costly business disputes that distracts from the business and also results in reputational damage.
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 the nature of your collaborative agreement it is best to get a commercial solicitor to check out the terms of the agreement.
The agreement may be exempt from the Chapter I prohibition if the agreement 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, and the agreement can't impose any restrictions which 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 there’s a risk the company 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 abuse include:
- Imposing unfair trading terms such as an exclusive purchase requirement
- Tying in purchases of services or goods so a tech retailor has to 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 will consider 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.
Practical tips on competition law
Commercial solicitors say it’s essential to minimise the risk of your company falling foul of competition law. Employees can't avoid anti-competitive practices if they don’t have a broad understanding of the rules so commercial solicitors and competition lawyers recommend:
- Creating a competition compliance policy and monitoring it. Even if the policy is breached the fact that your business developed a policy can be used in mitigation if there is a referral to the CMA.
- A training programme for staff so they understand the basics of competition law and how to internally report concerns. Ensure all employees are aware that breaching the firm’s anti-competition policy is a disciplinary matter that will put them in breach of their employment contract.
- 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 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 difficult market conditions but they may amount to collusion and an anti-competitive agreement.
- Look at contract life cycle management and don’t forget to review competition issues as your company market share may have increased to a dominant position or the guidance on anti-competitive agreements may have changed from when the contract was originally negotiated. 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 what amounts to good business practice (for example, exclusivity provisions in high end retail or tech) before committing the company to what could be 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. You may be able to resolve the CMA referral quickly and avoid potential litigation by using alternative dispute resolution (ADR).
- If you are a start-up that 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.