What is an anti-competitive agreement?
An anti-competitive agreement is where two or more companies operating as competitors in the same market agree to co-operate by, for example, fixing prices or dividing up the market, which has the effect of reducing competition in their market. Anti-competitive agreements can be written down or agreed informally and can be open or secret (ie, a cartel).
Why do we need markets to be competitive?
Companies competing against each other in the same market will usually try to gain a competitive advantage by eg, lowering their price or improving the quality of the product. This means the consumer can buy higher quality products at lower prices.
Companies in cartels that control prices or divide up markets so each one has a monopoly in part of the market don’t feel the usual competitive pressure to launch new products, improve quality and keep prices down. Consumers therefore ultimately have to pay more for lower quality goods. Cartel agreements are particularly damaging and therefore carry tough penalties for those who are caught.
UK and EU law
Under UK law two sets of laws working together simultaneously. If an agreement made by a UK company affects trade solely within the UK, this will be governed by Chapter 1 of the Competition Act 1998 (as amended by the Enterprise Act 2002). An agreement made by a UK company which extends beyond the UK to involve other EU member states will be governed by Article 81 of the EC Treaty.
What needs to be established for an agreement to be anti-competitive?
For an anti-competitive agreement to be found there needs to be:
- an agreement, arrangement or concerted business practice;
- which appreciably prevents, restricts or distorts competition; and
- which affects trade in the UK or EU respectively.
Which agreements are seen as anti-competitive?
To establish whether an agreement is ant-competitive, the object and effect of the agreement are examined, rather than whether the agreement was written down or not. If the object of an agreement was to restrict competition it means it was intended to restrict competition; if something has the effect of restricting completion it means it has in fact restricted competition.
The following types of arrangement are generally prohibited under Chapter 1 and Article 81:
- agreements which fix prices (both purchase and selling prices);
- agreements which fix trading conditions, eg, discounts;
- agreements which limit or control production, markets, technical development or investment (eg, setting quotas);
- agreements which share sources of supply;
- agreements which place other parties at a disadvantage (eg, placing different terms on different parties for the same kind of agreements).
What happens if a company breaches Chapter 1 or Article 81?
If a company has been found to have breached either Chapter 1 or Article 81 the punishments will be severe and can range include:
- a fine of up to 10% of the company’s global turnover;
- the provisions contained within the agreements which are deemed anti-competitive will become void and unenforceable.
Is it just the company who will liable?
Following the introduction of the Enterprise Act 2002, under Chapter 1 certain individuals involved in the agreements can be disqualified from becoming company directors and can face criminal convictions if the anti-competitive behaviour is serious enough. In the UK there are also powers to search company offices and home offices of directors to seize documents detailing the nature of the ant-competitive agreements.
Are there any exemptions to the rule in Chapter 1 or Article 81?
Even if an agreement falls within the Chapter 1 or Article 1 definition of anti-competitive, it can be exempt if the benefits of the agreement outweigh the competitive disadvantages or if it is necessary to improve products or services, develop new products or find better ways of making products available to consumers.
Research and development agreements and technology transfer agreements are often compatible with competition law, for example, because some new products require expensive research that would be too costly for one company working alone. Agreements on joint production, purchasing or sales, or on standardisation, may also be legal.
I own a small company; do I need to be aware of these provisions?
Every business regardless of its size, sector or legal status needs to be aware of these provisions. Competition law applies across all markets in the UK and EU so if you’re small company operating in one of these markets at home or abroad, care needs to be taken when entering into agreements with other companies on the same market.