Know the Rules or Pay the Price:

Firms and Competition Law Enforcement

Thursday 12th March 2009A presentation by the ESRC Centre for

Competition PolicyAn event in the ESRC Festival of Social

Science

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Centre for Competition Policy

Funded by the Economic and Social Research Council, main funding body for UK Social Sciences

Established at UEA 2004 – recently renewed until 2014

Research with real-world policy relevance without compromising academic rigour

Interdisciplinary: Economics, Law, Political Science, Business

15 Faculty, 15 research students, 5 full time researchers

Role of Consumers, Institutions, Market Power and its Regulation, Agreements and Tacit Collusion, Mergers

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The Questionnaire

Fourth time we run a questionnaire of this type

• Aim is to gauge beliefs

• Please take 5 minutes to fill in the questionnaire

We will return to the answers at the end

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Plan of the Afternoon

Cautionary Tales

Merger Law and Policy

Cartels and Other Agreements

Abuse of Dominance and Private Enforcement

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Cautionary Tales

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Too Little, Too Late

Linpac purchased Paxton on 7th September 2001; press release, but OFT not notified; told late November

Had to decide whether to refer within 4 months of purchase made public: did so 4th Jan 02

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“If more time had been available this merger [might] not be referred to the Competition Commission. However, the decision of the parties not to inform the OFT of completion of the transaction means that the … reference has had to be based on the evidence available.”

~ merger cleared on 13th May

Cost to company: at least half a million pounds, and further four months delay in integrating

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The British Airways/Virgin Atlantic Case

During that period, surcharges rose from £5 to £60 per ticket

Virgin reported these phone calls to the Office of Fair Trading

British Airways was fined £121.5m (UK) and $300m (US)…

Virgin incurred no fines

4 British Airways managers are pending trial in the UK and may face imprisonment of up to 5 years. 1 is already in a US prison

The Virgin managers will not be prosecuted

BA and Virgin deny the conduct had any effect on surcharges

Between August 2004 and January 2006, a small group of middle managers at British Airways phoned their counterparts at Virgin and had a few brief conversations about fuel surcharges

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The Sanctions in the UK

Fine of up to 10% of annual worldwide turnover in all operations

Imprisonment of up to 5 years in UK (10 years in US)

Private actions for damages (treble the overcharge in the US)

Any infringing agreement is void

Loss of reputation etc

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But we are the Public Sector!

Key factsNew service made a loss for Cardiff BusShortly after 2 Travel's exit from the market Cardiff Bus withdrew its own no-frills

services

NoteCardiff Bus is owned by Cardiff CouncilCardiff Bus had a very substantial share of the relevant market

Footnote'The OFT did not levy a financial penalty in this case because Cardiff Bus

turnover did not exceed £50 million at the time of the conduct

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OFT decision 18.11.08Cardiff Bus engaged in predatory conduct intended to eliminate a

competitor, 2 TravelCardiff Bus responded to the introduction of a new no-frills bus service

by 2 Travel, by introducing its own no-frills bus services

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They Thought it Was All Over

2005, 2006: JJB lose appeal to CAT and Court of Appeal

2007: Which? - a designated body - initiate case in CAT on behalf of over-charged consumers

2008: Settlement - consumers offered coupons

2009: Costs not settled yet

Costs are thought to stand at approximately £1mThe case secured just £100,000 in compensation for consumers

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2003: JJB part of cartel in 2001-02; fined £6.7 million for fixing prices of England and Man U football shirts

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Merger Law and Policy

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Catherine WaddamsESRC Centre for Competition Policy and Norwich Business School

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Merger Rules

Europe

If combined turnover more than €5bn worldwide and more than €250m in EU and less than ⅔ from one Member State

Must notify Commission

Preliminary stage: is there a problem?

Companies often offer remedy

If so, secondary, both within DG Competition

Two stage process: UK and EU rules slightly different unlike some other areas of Competition Law

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UK Stage 1: OFT

Can consult in advance for informal advice (Linpac did)

Value of turnover in UK of ‘target’ firm more than £70m or merger results in at least 25% of market

May seek initial undertakings to prevent integration for completed mergers

Invites comments from customers, suppliers, competitors (often raise other issues e.g. collusion suspicions)

Merging parties have opportunity to respond to anonymised version of others’ comments and encouraged to keep in close touch with OFT

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Possible OFT Actions

Is there a ‘realistic prospect’ of a Substantial Lessening of Competition (SLC)

Must refer if believes it more likely than not

If greater than ‘fanciful’ but less than 50%, at its discretion

May decide:

Clear the Merger or

De minimis or customer benefits outweigh any SLC or

Make a reference to the CC or

Accept undertakings in lieu of reference

OFT advice: consult a lawyer

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Stage 2: Competition Commission

Separate non-governmental organisation

Interim undertakings/orders, applies SLC criteria: more in depth study: five and a half months

Higher standard of proof: has resulted or may be expected to result in an SLC: more than 50%

Process: Site visit: Merging companies choose and set agenda – opportunity for informal meeting

Two formal (transcripted) hearings with main parties

More consultation (some hearings) with third parties

If SLC: Provisional remedies soon after provisional findings

Opportunities (for all) to respond at each stage

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Overview of the Universe of Merger Remedies

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Cartels and Other Agreements

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Andreas StephanNorwich Law School and ESRC Centre for Competition Policy

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The Economics: Why Cartels are Harmful

Raising prices above marginal cost (supernormal profits)

Higher prices and less output equals ‘deadweight loss’ to economy

Little or no efficiency gains (unlike mergers)

Throwing a life line to inefficient firms

Wealth transfers from consumers to firms

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The Law: What is IllegalChapter I, Competition Act 1998 (Article 81 EC)

Coordinated conduct which appreciably restricts competition

Applies equally to agreements, decisions by associations of undertakings and concerted practices between undertakings (deliberately wide)

No agreement necessary – any behaviour which “knowingly substitutes practical cooperation for the risks of competition” ~ Dyestuffs (1972)

Horizontal price fixing, output restriction, market sharing are per se illegal (Object agreements)

Otherwise analysis of competitive effect of conduct must be carried out (Effect agreements)

Article 81(3) permits an exception where restrictive conduct leads to efficiency gains – unlikely for object agreements

S.188 Enterprise Act – criminal offence to ‘dishonestly agree’ to object type agreements

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How Far Does the Law Go?

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In oligopolistic markets, it is very difficult to distinguish between conduct which is collusive and conduct which is natural result of market structure

All firms may raise prices at same time, by same amount independently of each other

It is the method and not the result that is important

It is lawful to act intelligently in response to another’s conduct (or anticipated conduct)

It may be unlawful to act with knowledge of another’s conduct – key is mutual contacts. Directing information towards competitors

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Establishing an Infringement

The Competition Authority may:

1. Prove infringement by analysis of the market

Problematic

Woodpulp (1985) – other explanations for observed behaviour

2. Collect physical evidence

Most infringements established in this way

Leniency programme induces self reporting

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Reasons why Cartelists Meet

Reaching agreement

Implementing

Monitoring for cheats

Changes in cost and demand

International Arbitrage

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Evidence: Beware of Emails from Competitors

“Ian…This is a great initiative that you and Neil have instigated!!!!!!!! However, a word to the wise, never put anything in writing, its highly illegal and it could bite you in the arse!!!!” ~ Hasbro, Argos, Littlewood (2003)

“Confidential please, so we aren’t accused of being a cartel.” ~ British public school fees (2005)

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How to Stay Out of Trouble

Internal compliance programme

Competent competition lawyers

Report an infringement. Why? The first firm to self-report gets immunity from fines and criminal prosecution. Second and Third also get reduced fines

Remember that the boundaries of markets and legal jurisdictions do not usually coincide

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Abuse of Dominance

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Morten HviidNorwich Law School and ESRC Centre for Competition Policy

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Chapter II, Competition Act 1998 (Article 82EC)

… any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom

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Dominance is?

Formally

A position of economic strength enabling a firm to behave to an appreciable extent [profitably] independently of its competitors and customers

Reality

Assessed mainly on market share50% generally enough but can be lower

Can be local (e.g. Cardiff buses)

It is not “having” it, it is “abusing” it!

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Abuse

It is not “having” it,

Success through hard work and by providing consumers with what they want is good

It is “abusing” it!

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Examples of Abuse from the Act

Exploitative

a) Excessive pricing

b) Predatory pricing

c) Discriminatory terms including pricing

Exclusionary

a) Discounts and rebates

b) Tying

c) Refusal to supply

d) Essential facilities

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Consequences of Breach

Fines of up to 10% of group global turnover

Conduct can be stopped by court injunction

Exposed to actions from third parties who can show they have suffered loss as a result of the anti-competitive behaviour

Disqualification from being a company director

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Private Enforcement

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Morten HviidNorwich Law School and ESRC Centre for Competition Policy

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If you Have Been Harmed…

…by someone breaching competition law, you can seek:

Compensation for the loss you have suffered

An injunction against the harmful act

Strong push for this additional enforcement from the European Commission

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Timing?

You can potentially pursue the case either through

The Chancery Division of the High Court, or

The Competition Appeals Tribunal (CAT)CAT only if the case follows on from a decision by a

relevant competition authority

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It May Not Happen

Costs

Competition cases are likely to be costly in terms of experts

Risky

Disproportionate to the likely damages

Funding

Legal aid? CFA? ATE?

Repercussions

You may have to deal with the people you are suing in the future

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Group Action

To spread costs/risks, versions of the “class action” have been proposed

Designated bodyConsumer Association in the JJB sports case

Possible that other bodies can be granted this status

Proper class action?In the news in Scotland triggered by financial crisis

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Overall Conclusion

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Compliance Programmes

Firms should have a compliance programme and associated training

Inattention to competition law could harm you whether you are the infringer or the victim

Knowing the rules mayPrevent you from infringing the lawHelp you protect yourself against othersHelp you deal with strategic claims by others

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Morten HviidAndreas StephanCatherine Waddams

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Questionnaire Results and General Discussion

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