Competition law is inescapable in the global business environment.
Almost every country in the world has established competition laws. These countries' competition laws can (and regularly do) extend beyond geographic borders where what happens outside those borders affects the structure of trade and/or competition within them.
So moving business out of one territory or not opening an office there, does not mean that the competition laws of that country are irrelevant and can be ignored. The good news is that most competition laws are based on the same – or very similar – trading principles, so it is generally possible to adopt a common approach to compliance, which helps to achieve operational certainty. For example, in the EU, European competition law sets the trend for national state versions who must follow suit. Member states must also consider the application of EU competition law before turning to their own version.
Questions we answer in this guide
- What is competition law and what do you need to know about it?
- What are anti-competitive relationships and why are they unlawful?
- What are the consequences of breaking competition law?
What is competition law?
Competition – maximises consumer welfare
Competition, or the process of rivalry between business seeking to win customer loyalty, market penetration and growth, lies at the heart of most modern economies.
Popular economic theory promotes the idea that competitive markets, where this rivalry is at its most fierce, are those in which the interests of consumer welfare are usually best protected.
Put another way, healthy competition equals efficient (often lower) prices, plenty of substitutable products/services from which a consumer can choose, great quality, allocative and productive efficiency and regular product or service upgrades and innovation.
There are 5 principle strands to competition law. These prohibit:
Don't gang up
Make your business decisions independently; your business relationships fair and consumer friendly
Don't be a bully
Play fair. If you're one of the 'big fish' (or the biggest), don't throw your weight about and exploit your business partners or unfairly prejudice your competitors
Get together smartly
Manage product and territorial overlaps in M&A transactions and do your paperwork on time
If it is broken, it can be fixed
If a market is not working, regulators can step in and fix things. You can even ask them to do so to your benefit
State bail-outs or rescue packages for failing businesses may well be unjustified and unfair. You could successfully challenge them
What do I need to know?
The competition rules that most affect businesses on a daily basis are those that relate to agreements or relationships and behaviour:
Unlawful relationships Anti-competitive relationships, however they are formed and represented (i.e there is no need for anything in writing), between two or more independent businesses are prohibited.
Prohibited unilateral behaviour Anti-competitive actions of leaders, acting alone and who are technically considered to be 'dominant' enterprises under competition law are also forbidden.
The European Commission, National Competition Authorities and other Enforcement Agencies, (e.g the UK's Serious Fraud Office), have very extensive powers to enforce these provisions and investigate infringements, including the ability to raid premises (with or without prior notice), to search desks and filing cabinets, diaries, iPads, phones, Blackberries, briefcases and company cars, private houses, emails and to copy or remove all sorts of documents and records that they find.
Companies infringing these prohibitions can be fined heavily, (up to 10% of annual, worldwide, group turnover) and will be immediately prevented from continuing infringing activities (with any economic loss consequences uncompensated).
In some jurisdictions, including the UK, an infringement can give rise to criminal penalties, (fines and imprisonment), as can wilful concealment of evidence, destruction of documents or the supply of false or misleading information.
Competition law prohibits any agreements, arrangements, understandings or practices between companies (or associations of companies e.g trade associations) that has – as their direct objective or practical effect – the legally unjustifiable, prevention, restriction or distortion of competition within a defined market, and that have an appreciable impact on trade in the market.
What does the rule do?
It prohibits a number of activities that can be attributed to a business relationship between two or more completely unrelated businesses. In many cases, if the rule is infringed, the relationship to which it applies becomes instantly and automatically unlawful, void and unenforceable.
The business will be vulnerable to fines and other sanctions/penalties unless they can justify the arrangements by reference to a typically broad list of exemptions.
When does the rule apply?
The rule is tricky and can apply even when you do not expect it to do so. This is because it applies not only to formally constituted agreements, but even arrangements that could fall a long way short of what you might consider to be a typical agreement. So it can apply to any sort of business arrangement, including a handshake agreement, an exchange of letters or series of phone calls or emails, if there is any understanding or consensus as to the action that each party will or will not take in response.
The rule applies equally to agreements with competitors, suppliers, customers, distributors and other third parties.
Size often does not matter,. Even small businesses can find themselves in trouble where this rule is concerned.
What if I did not or intend to do something unlawful?
Despite not intending to do something anti-competitive, the law will still be broken if the arrangements have the practical, knock-on impact of stifling or removing competition to an appreciable extent – 'appreciable' being a technical term that is defined and measured using a number of factors, including economic analysis.
What if I did not know there was a problem?
Ignorance is no defence and it is unlikely to be a mitigating factor when punishment is being calculated. The rule applies regardless of what your intentions might have been.
What not to do...
'You bid for the tender. I'll bid for the next one. We won't bid against each other. That way, we should both win.'
'We agree that you will take and pay for these services when you purchase your requested goods'.
'We agree that you will supply these customers and we will take the others'.
Resale price maintenance
'We agree that you won't sell these goods at a discount'.
'Let's set our prices at £X. We can both earn profit without worrying about losing business'.
Confidential information sharing
'If you tell us what you plan to do on your pricing, we can make sure we do the same'.
'As competitors, we all agree that we will not use that type of supplier. That will resolve our concerns about discounting practices and competition.
'We both agree that you won't sell more than 10 units p.a, even if you could. We can stockpile the difference and keep the prices high'.
Competition law mandates that...
If a business/group is in a dominant position in any relevant market ('market' being technically defined by reference to both product and geographic boundaries), then it is under the additional obligation (the 'special responsibility') not to abuse that position of market power. If it abuses that position, it infringes competition law and faces the prospect of significant penalties.
What does the rule do?
It identifies businesses in a position of market power (technically called 'dominant') who are considered to be capable of operating without competitive restraint. These companies are usually the trendsetters, the household names that are synonymous with the generic product or service under consideration. Usually, they are easy to spot. Importantly, market power is defined as the power to influence market prices, output, innovation, the variety and quality of goods/services on the market for a significant period of time.
What does it mean if it applies to us?
Once identified, these powerful businesses are legally imbued with a special responsibility not to use their market power in a way that prevents, restricts or distorts competition without an objective justification in the eyes of the law.
This special responsibility means that these businesses are often subjected to more rigorous scrutiny and restriction that those who fall outside the parameters of the rule.
How can I work out if a business is 'dominant'?
There are three components to the test:
(i) a position of economic strength on a defined market;
(ii) which enables the holder of that position to prevent effective competition on that market;
(iii) by affording it the power to behave to an appreciable extent independently of its competitors, customers and consumers.
As starting rule of thumb, if a business or corporate group has a market share of 40% or more, it could well be considered to be 'dominant'. However, dominance can be established well below this threshold and is not necessarily established if it is exceeded. The conclusion will lie in the result of a complex legal and economic analysis.
Remember: Only abuse of this position of power is unlawful, not simply being in that position.
What not to do...
'We will only supply you if you buy all your goods from us.'
Predatory pricing policies
'Acme Mining is stealing our market share, let's price them out of the market...'
'These goods aren't very popular. Let's tie their sale to the more popular ones so that clients have to buy them as well'
'Let's give ABC better terms. They get the whole pricing strategy so much better than XYZ...'
'We require more information from clients on their costs, stocking policies and margins so that we can work out who is worth rewarding'
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