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COMPETITION LAW NOTES Richard Whish & David Bailey

Competition policy and economics The growth of competition law Competition law has grown at a phenomenal rate in recent years in response to the enormous changes in political thinking and economic behaviour. There are now over 130 systems of competition law in the world. Some of them have been in place for a while, for example, the Sherman Act 1890 was adopted in the US. The competition rules of the EU were contained in the Treaty of Rome 1957. Competition law in the UK began with the Monopolies and Restrictive Practices (Inquiry and Control) Act 1948. Competition laws give effect to economic policy and in recent decades, economic policy in most countries has tended to favour a free market economy in which firms compete with one another for customers. Most of the world’s socialist economies have now been dismantled and many legal monopolies have been abolished in recent years. Competition law and economics If a country chooses to operate by policy of a free market, there is a strong argument that there ought to be laws in place to ensure the market functions properly. A central concern of competition law is that firms can harm competition by possessing some degree of market power. The concept of market power is an economic one and means the ability to reduce output, to raise prices, to reduce quality, to limit choies or to suppress innovation. Therefore, competition lawyers must understand economic concepts. Competition law is about the economic analysis of markets within a legal process; each case will depend on its own circumstances.

Overview of the practices controlled by competition law Systems of competition law are concerned with practices that are harmful to the competition process. In particular:  Anti-competitive agreements – Agreements that restrict competition are unlawful, unless they have a redeeming

virtue such as the enhancement of economic efficacy. An example of an illegal agreement would be if companies decided to fix prices, share markets or restrict output – often referred to as horizontal agreements. Agreements of this kind are severely punished. Agreements between firms at different levels of the market e.g. where a supplier instructs the retailer to not resell below a certain price, are known as vertical agreements. These aren’t as harmful to competition.  Abuse of substantial market power – Abusive behaviour by a firm that has a dominant position on the market is unlawful. An example would be a dominant firm reducing its prices to lower than cost in order to drive a smaller firm out of the market – a phenomenon known as predatory pricing.  Mergers – Competition law governs mergers clearly because if one competitor were to acquire another, the possibility exists that market will become less competitive and consumers may have to pay higher prices.  Public restrictions of competition – The state is often responsible for restrictions and distortions of competition, for example, as a result of legislative matters, regulations etc.

The function of competition law Goals of competition law In recent years, many competition authorities have stressed the importance of consumer welfare when interpreting and applying competition law. It would be reasonable to point out that, although the consumer welfare standard is currently in the ascendancy, many different policy objectives have been pursued in the name of competition law over the years and different systems reflect different concerns. However, there are some general goals that are worth mentioning: i. Consumer protection – Competition law should protect the interests of consumers, not by protecting the competitive process itself, but by taking direct action against offending undertakings, for example, by requiring dominant firms to reduce their prices. ii. Redistribution – A second possible objective of competition law might be the dispersal of economic power and the

iii.

iv.

redistribution of wealth: the promotion of economic equity rather than economic efficiency. Protecting competitors – Linked to the argument that competition law should be concerned with redistribution is the view that competition law should be applied in such a way as to protect small firms against more powerful rivals: the competition authority should ensure the ‘small guy’ is given a fair chance to succeed. Unfair competition – It is obviously not ‘fair’ if one firm pretends that its goods were produced by someone else with a better reputation or brand image and gains a competitive advantage, for example. The question is whether competition law should or even can strive to produce ‘fairness’ as an abstract principle. As with redistribution and the protection of competitors, there is a risk that seeking to achieve fairness will distort the process of competition.

Overview of EU and UK competition law EU Law The EU Treaties The European Union is established by two Treaties: The Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU). There are currently 28 Member States of the EU, however, the referendum held in the UK on whether or not to remain in the EU resulted in a ‘no’ vote and the UK are therefore set to leave the EU. Under the Treaties, the MS confer ‘competences’ on the EU so that it can fulfil its objectives, one of which is a highly competitive social market economy. Much of EU law is concerned with the elimination of obstacles to the free movement of goods, services, persons and capital and the removal of these obstacles promotes competition within the Union. The competition chapter in the TFEU

EU competition law is contained in Chapter 1 of Title VII of Part 3 of the TFEU and consists of: • Article 101(1) which prohibits agreements, decisions by associations of undertakings and concerted practices that have as their object of effect the restriction of competition, although this prohibition may be declared inapplicable where the conditions in Article 101(3) are satisfied • Article 102 which prohibits the abuse by an undertaking or undertakings of a dominant position • Article 106(1) which imposes obligations on MS in relation to the Treaty generally and the competition rules specifically, while Article 106(2) concerns the application of the competition rules to public undertakings and private undertakings to which a MS entrusts particular responsibilities • Articles 107 to 109 which prohibit state aid to undertakings by MS that might distort competition in the internal market. An important additional instrument of EU competition law is the EU Merger Regulations (EUMR) which applies to concentrations between undertakings that have an EU dimension. The single market imperative It is important to stress that EU competition law is applied by the Commission and the EU courts very much with the issue of single market integration in mind. The Commission has described the single market as ‘one of the EU’s biggest assets … which it is determined to protect’. Agreements and conduct which might have the effect of dividing the territory between MS will be closely scrutinised and may be severely punished. The Commission acts as a guardian of the single market and is determined to prevent any retreat into economic nationalism.

Economic and monetary union The creation of the Euro has an important influence on competition within the EU. Price comparisons are difficult when the same goods and services are sold in different, variable currencies; the problem is compounded by the cost of exchanging money. The aim of the ‘Single Euro Payments Area’ is to harmonise the payments across the EEA by using common procedures and standards for payments in Euro.

The modernisation of EU competition law In the first half of the 1990s the realisation that there was something wrong with the way in which the competition rules were applied in practice began to become widely recognised. An obvious problem was that Article 101 (restrictive agreements) and Article 102 (abuse of dominance), were enforced with insufficient attention to economic principles. There followed a reform which involved a major repositioning of the law and economics of the subject which appears to have worked well in practice.

Institutions Council of the European Union The supreme legislative body of the EU is the Council of the European Union, often referred to as the Council of Ministers. The Council is not involved in competition policy on a regular basis. However, acting under powers conferred by Articles 103 and 352 TFEU, the Council has adopted several major pieces of legislation. European Commission The European Commission is at the core of EU competition policy and is responsible for fact-finding, taking action against infringements of Articles 101 and 102, imposing penalties, adopting block exemption regulations, investigating mergers and developing policy and legislative initiatives. The Commission is also involved in the international aspects of competition policy, including cooperation with competition authorities around the world. One of the Commissioners is responsible for competition matters; this is regarded as one of the most important portfolios within the Commission. Certain decisions can be taken by the Commissioner for Competition rather than by the College of Commissioners. There are also two Hearing Officers directly responsible to the Commissioner, who are responsible for safeguarding the exercise of procedural rights during Commission proceedings enforcing EU competition law. DG COMP is the Directorate of the Commission specifically responsible for competition policy. DG COMP has a Director

General and three deputy Director General’s. There is also a Chief Competition Economist who reports directly to the Director General.

General Court The General Court came into being in September 1989. Among its tasks is the hearing of appeals against Commission decisions in competition matters under Articles 101 and 102. The Court reviews the legality of decisions according to the provisions of the TFEU. The Court of Justice has said that the judicial review provided for by the Treaties involves review by the General Court of both the law and the facts, and means that the General Court has the power to assess the evidence, to annul a decision and to alter the amount of any fine that has been imposed. Court of Justice This Court hears appeals from the General Court on points of law only. The Court of Justice has been strict about what is meant by an appeal on a point of law, and it will not get drawn into factual disputes. The Court also deals with points of EU law referred to by national courts or tribunals under Article 267 TFEU.

UK Law The promotion of competition is an important part of UK economic policy. This commitment to competition has manifested itself in important changes in the competition law of the UK. Acts such as the Competition Act 1998 and the Enterprise Act 2002 fundamentally changed both the substantive provisions and the institutional architecture of the domestic competition law of the UK. Competition Act 1998 The main provisions of this Act entered into force on 1 March 2000. It contains two prohibitions: 1. The Chapter I prohibition is modelled on Article 101(1) TFEU and forbids agreements, decisions by associations of

undertakings and concerted practices that have as their object or effect the restriction of competition.’ 2. The Chapter II prohibition in the Act is modelled on Article 102 TFEU and forbids the abuse of a dominant position. Section 60 of the Act contains provisions designed, so far as possible, to maintain consistency between the application of EU and domestic competition law. It remains to be seen what will become of Section 60 as a result of Brexit. Enterprise Act 2002 The main provisions of this Act entered into force on 20 June 2003. It is a major piece of legislation that amended domestic competition law in a number of ways: o First, the Act changed the institutional architecture of the domestic system, for example by creating the CAT and by reducing powers of the Secretary of State to make decisions in competition cases. o Secondly, the Act contained new provisions for the investigation of mergers and markets. o Thirdly, the Act supplemented and reinforced the Competition Act 1998 in various ways, in particular by introducing a criminal ‘cartel offence’. Enterprise and Regulatory Reform Act 2013 This Act made further alterations to the UK regime. For example, it abolished the OFT and the CC by creating a new institution, the Competition and Markets Authority (CMA). It also amended the criminal cartel offence to make it easier to prosecute. Consumer Rights Act 2015 This Act significantly amended the domestic system of private enforcement of competition law: o It expanded the jurisdiction of the CAT (Competition Appeal Tribunal) so that it can hear ‘standalone’ cases as well as ‘follow-on’ ones. o It introduced a procedure for CAT to allow a representative to bring collective proceedings on behalf of a defined class of claimants. o It enabled CAT to approve a collective settlement. o It provided power for the adoption of rules for a ‘fast-track procedure’ for claims made under s.47A Competition Act

Institutions See pages 62-75 for details

A notable feature of UK competition law is the number of institutions involved. Competition law in the UK assigns roles to the Secretary of State, the Lord Chancellor, the CMA, the Serious Fraud Office, the sectoral regulators, the CAT and to the civil and criminal courts.

The relationship between EU competition law and national competition laws All the MS of the EU have systems of competition law, in large part modelled upon Articles 101 and 102. Some MS require that domestic law should be interpreted consistently with EU rules, thereby reinforcing the alignment of EU and domestic law. It follows that many cases will have the same outcome whether they are investigated under EU or domestic law. However, the possibility remains that there could be different outcomes depending on which system of law is applied. EU law takes precedence over national law, so that where a clash occurs it is the former that must be applied: in Walt Wilhelm v Bundeskartellamt, the Court of Justice held that conflicts between the EU and national rules on cartels must be resolved by applying the principle that EU law takes precedence.

Market Definition and Market Power See pages 26-49 for details

Competition law is concerned, above all, with the problems that occur where one or more firms possess, or will possess after a merger, market power. For example, the legal concept of a ‘dominant position’ in Article 102 equates to the economic concept of ‘substantial market power’. In a perfectly competitive market, no firm has market power; in a pure monopoly one firm has absolute control over consumers. There is a continuum between these two extremes and many degrees of market power lie along it.

It is the issue of market power that lies at the heart of competition law and policy. A variety of legal tests can be found in UK and EU competition law, but in essence they all express a concern about the misuse of market power:  Firms should not enter into agreements that have the effect of restricting competition (Article 101): however, any such restriction must be appreciable, and there is a ‘de minimus’ exception where an agreement does not have as its object the restriction of competition and the parties to the agreement lack market power.  Block exemption is not available to parties to agreements where the parties’ market share exceeds a certain threshold.  Firms should not abuse a dominant position (Article 102).  Mergers can be prohibited under UK law that would substantially lessen competition (Part 3 Enterprise Act 2002). EU and UK competition law adopt a two-stage procedure when determining whether a firm or firms have or would have market power: 1. First, the relevant market is defined in relation to which market power may exist - this requires a definition of both the relevant product and the relevant geographical market. 2. Second, it must be determined whether a firm or firms have market power in the relevant markets.

Article 101(1) Chapter 3 – page 82

Article 101(1) TFEU prohibits agreements, decisions by associations of undertakings and concerted practices that are restrictive of competition. 101(1) may be declared inapplicable where the criteria of 101(3) are satisfied. An agreement which is prohibited by Article 101(1) and which does not satisfy Article 101(3) is stated to be automatically void by the virtue of Article 101(2). Article 101(1) is as follows: 1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the

prevention, restriction or distortion of competition within the internal market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void. 3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of: - any agreement or category of agreements between undertakings, - any decision or category of decisions by associations of undertakings, - any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

Undertakings and associations of undertakings Five issues must be considered in respect of this term: i. Its basic definition for the purposes of Articles 101 and 102 ii. The meaning of ‘associations of undertakings’ iii. Whether two or more legal persons form a single economic entity - and therefore comprise one undertaking – and the significance of this iv. Whether two or more entities may be treated as one undertaking where there is a corporate reorganisation v. Which undertaking is liable for an infringement of competition law when one business is sold to another The Treaty doesn’t define an ‘undertaking’, but it is a critically important term since only agreements and concerted practices between undertakings are caught by Article 101; similarly, Article 102 applies only to abuses committed by dominant undertakings. Basic definition (i) The Court of Justice held in Hofner and Elser v Macrotron that:

‘The concept of an undertaking encompasses every entity engaged in an economic activity regardless of the legal status of the entity and the way in which it was financed.’ In Pavlov, the Court added that: ‘It has also been consistently held that any activity consisting in offering goods or services on a given market is an economic activity.’ The Court of Justice also pointed out in MOTOE: ‘The classification as an activity falling within the exercise of public powers or as an economic activity must be carried out separately for each activity exercised by a given entity.’ Thus, for example, a local authority may (a) have powers to adopt by-laws specifying where cars can and...