Competition Act - Chapter I prohibition

Competition Act - Chapter I prohibition

Contents

The Competition Act 1998 contains 2 prohibitions: the Chapter I prohibition and the Chapter II prohibition.

What is the Chapter I prohibition?

The Chapter I prohibition bans agreements between 2 or more businesses that prevent, restrict or distort competition within the UK and that might affect trade within the UK.

The prohibition applies to all arrangements, whether or not they're in writing. The Act lists specific types of provisions in agreements that are likely to breach the Act, such as price-fixing. If several suppliers of a product agree to charge the same prices, they'd be breaching the Act by agreeing to price-fixing.

These sorts of arrangements interfere with the ability of normal market forces of demand and supply to determine prices. They can result in prices being higher than in a competitive market. This is detrimental to the consumer.

A distribution agreement, particularly one that appoints an exclusive distributor, might contain terms that breach Chapter I. The agreement would be between 2 separate undertakings – the manufacturer (often called the supplier) and the distributor. An exclusive distribution agreement would provide that the distributor is the only person selling the product in a particular area in the UK. This would limit the supply of that product in that area and would narrow the choice of suppliers for the consumer. This could restrict competition and breach Chapter I. A distribution agreement mustn't fix the prices at which the distributor sells to their customers, as this would breach the Chapter I prohibition.

Consequences of breach

The consequences of breaching competition law can be quite serious. The Competition and Markets Authority (CMA) has taken over from the Office of Fair Trading in administering fines. These can amount to up to 10% of the worldwide turnover of the guilty parties.

The CMA has wide-ranging investigative powers under the Act. These include the power to enter premises and seize documents that may be relevant to the investigation. The CMA can order the parties to stop breaching the Act.

Some people have been known to take part in cartel activities. A cartel is a group of people or companies at the same level of the supply chain (often suppliers) who act together in an anti-competitive way e.g. by fixing prices. Individuals involved in serious cartel infringement can be punished by imprisonment or fines, and can be disqualified to act as directors.

An agreement that breaches the Act is automatically invalid. Third parties who have suffered loss as a result of an anti-competitive agreement can claim damages or an injunction against the parties to the agreement.

Ways around breach

Non-appreciable effect on competition

The Act is aimed at agreements that have an 'appreciable' (i.e. economically significant) effect on competition and trade. If the parties to an agreement that prevents, restricts or distorts competition have a very small share of the market, their agreement may not have an appreciable effect on competition in the market or on trade.

In calculating market share, the competition authorities consider the:

  • Market for the product and its substitutes (the 'relevant product market'); and
  • Geographical area where supply conditions are similar (the 'relevant geographic market').

Vertical agreements are treated more leniently than horizontal agreements. Vertical agreements are between businesses at different levels of the supply chain, e.g. a manufacturer and distributor. They're normally considered appreciable enough to affect competition if the parties each have a market share of up to 15%.

Horizontal agreements are between businesses at the same level in the supply chain, e.g. 2 or more manufacturers. These are also called cartel agreements. They'll normally appreciably affect competition if the parties jointly hold a market share exceeding 10%.

The CMA wouldn't normally enforce sanctions against parties to an agreement that doesn't have an appreciable effect on competition or trade. However, the agreement itself may still be invalid.

Limited immunity for small agreements

A small agreement is defined by the Act as an agreement in which:

  • the parties' joint turnover doesn't exceed £20 million, and
  • there are no price-fixing provisions.

If a small agreement breaches Chapter 1, the parties will have limited immunity from fines. However, the agreement itself may still be invalid.

Exemptions from a breach of Chapter 1

If the market shares of the parties to an agreement are high enough for the agreement to have an appreciable effect on competition, then it may be possible to get an exemption from Chapter I. This may also be possible if their turnover is too high for the agreement to be a small agreement.

There are 3 main types of exemption from a breach of Chapter I:

1. Individual exemption

The parties to an agreement need to self-assess their agreement to see if it fulfils the criteria for an exemption.

If all of these conditions apply, the agreement will be valid, won't breach Chapter I, and none of the consequences of breach will apply:

  • The agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress
  • The agreement mustn't contain restrictions that go beyond what is necessary to achieve this aim
  • Consumers will get a fair share of the benefit; and
  • The agreement won't eliminate competitors from the market.

An exclusive distribution agreement may qualify for the exemption. The protection of being exclusive might encourage the distributor to take on the risk of distributing the product. This would contribute to improving the distribution of the product. An exclusive distribution agreement could qualify for the exemption if it didn't contain terms that went further than was necessary to improve distribution of the product, and as long as the consumer got a fair share of the benefit of improved distribution. An exclusive distribution agreement wouldn't affect manufacturers of other competing brands, and is therefore unlikely to eliminate competitors.

2. Block exemption

There are various block exemptions that provide guidelines to be followed for certain types of agreement to be exempt.

3. Parallel exemption

If the agreement would be protected from a breach of European competition law by an EU exemption (see 'Article 101 TFEU' below), this EU exemption can also be used as protection from a breach of the Chapter I prohibition. There's an EU block exemption (the Vertical Agreements Block Exemption) that covers distribution agreements. If the distribution agreement is drafted according to the guidelines in this block exemption, it'll be exempt from a breach of EU law (Article 101) and Chapter I. To qualify for the block exemption, the market share of the supplier and distributor must each be less than 30%. (See Drafting a distribution agreement according to vertical agreements block exemption for more information.)

Article 101 TFEU

EU law contains a similar prohibition to Chapter I. Article 101 of the Treaty on the Functioning of the EU ('TFEU') bans agreements between businesses that prevent, restrict or distort competition within the EU and that affect trade between member states of the EU. Article 101 lists the same examples of anti-competitive provisions as Chapter I, such as price-fixing agreements.

The effect on competition and trade has to be felt in the EU for there to be a breach of Article 101 and to be felt in the UK for there to be a breach of Chapter I.

Consequences of breach of Article 101

The consequences of breaching Article 101 are the same as those for breaching Chapter I (see above). If the breach is sufficiently important and involves large multi-nationals, the European Commission can enforce sanctions (instead of the CMA).

Ways around breaching Article 101

Non-appreciable effect on trade

Agreements aren't regarded as having an appreciable effect on trade if the combined market share of the parties is less than 5% of the relevant market, as long as:

  • for horizontal agreements, the parties aggregate turnover in the EU is less than €40 million, or
  • for vertical agreements, the seller's turnover in the EU is less than €40 million.

The CMA wouldn't generally impose sanctions in such agreements.

Non-appreciable effect on competition

The position is the same for breach of Chapter I and breach of Article 101 – see above.

Exemptions

The same criteria apply to individual exemptions from Article 101 as to individual exemptions from Chapter I (see above).

The EU Vertical Agreements Block Exemption applies to breaches of Article 101. It can be used where the supplier and distributor each have less than 30% market share. (See Drafting a distribution agreement according to vertical agreements block exemption for more information.)