COMPETITION - Market share and share alike.

John Bridgeman isn’t a man you should mess with. The director general of fair trading has had a bit of a problem mincing his words of late, and is clearly rubbing his hands with glee at the prospect of the tough new powers he’s going to get when the Competition Act (1998) comes into force next year. For example, the Office of Fair Trading recently caught Volvo Car UK arranging to fix prices with its chain of dealers. At the moment, Bridgeman’s strongest sanction was to refer the case to the Restrictive Practices Court (which would then tell the company not to do it again), although, in fact, Volvo was wise enough to make a commitment to change its ways (see box, page 36), and avoided the censure. But Bridgeman made no bones about what would happen when he gets his new toys to play with on 1 March: “Then I will have considerably improved powers of investigation and will be able to order that such activities are ended immediately. Furthermore I will be able to fine companies up to 10% of their UK turnover for infringement of the prohibition on price-fixing agreements.” Add to that the OFT’s new power to conduct “dawn raids” against companies it merely suspects of acting anti-competitively – until the new Act is in force, the authorities must have proof of such behaviour before beginning an investigation – and it becomes clear that 1 March should be a date circled in every director’s diary. From then on, you’d better be sure you don’t transgress. But what constitutes transgression? The problem for many companies is going to be a matter of definition. “When you talk to people about the Competition Act, they tend to say, ‘well, I’m not dominant, so I don’t have a problem’,” says Paul Hughes, partner at law firm Edge Ellison, who has been running seminars on the Act for companies around the UK. “What they fail to understand is that, even if they’re non-dominant themselves, they could be part of a practice perpetrated by other non-dominant companies that is anti-competitive and where collectively they have significant market share; or where they’re part of a practice with a company which is dominant, and they could be fined along with the dominant undertaking.” This level of confusion is no surprise to many who have looked closely at the Competition Act. Other examples include the definition of market share. Firstly, the “market” can be defined by products, sectors or geographies (and, bear in mind, under the new Act, anti-competitive behaviour may be identifiable even in small regions). And “share” is often inexact. “If you’re one of the only three companies manufacturing train couplings, you’ll probably know exactly what your share is,” Hughes points out. “But in most markets, defining share will be much more difficult.” The authorities may even refer to trade publications to estimate a company’s market share. Certain sectors are more likely than others to come in for a hard time, especially those where would-be competitors appear to have high barriers to entry, where pricing is stagnant or there are few players. Companies in those areas would be well advised to make readiness for the Act a priority. While the OFT is looking forward to exercising its new powers, the reaction from companies has been low-key, to say the least. Even the OFT has recognised that awareness of the Act is limited. “There’s a lot of head-burying – the signs are all there, you have to be blind not to see it in the press,” says Hughes. “Industrial practice has not yet caught up with the policy changes, which I find bizarre. Commercial awareness of what could be a regulatory juggernaut coming their way just isn’t there – it may be decades of particular managerial attitudes, or the fact that people find competition law opaque and inaccessible and have chosen not to consider it.” Financial Director and Edge Ellison surveyed a small sample of FDs to find out the extent of preparation within UK firms. A vast majority hadn’t taken steps to put a compliance procedure in place (reviewing contracts and commercial practices, for example), and many hadn’t even become aware of the Act. Interestingly, most of the respondents could not give us an accurate figure for their market share, which is the crucial test for many of the Act’s provisions. One company secretary was establishing a compliance programme. But his comment on the Act was harsh: “We have far too many petty and not so petty rules,” he wrote. “But we are the only country that does not ignore most of them.” Hughes has come across similar sentiments after holding seminars on the Act. “Somebody came up to me afterwards and said, ‘These are interesting, tough new rules, but tell me: if we were in Italy would we have bothered to have this seminar?'” he says. But the plain fact is, in the UK, the OFT certainly won’t be pulling any punches, so whether or not our European colleagues decide to enforce the EC Treaty regulations or their own mirror legislation is neither here nor there. Bridgeman has made it clear that the first member of a cartel that owns up to price fixing or other anti-competitive activity will actually get off without a fine, regardless of the findings of any investigation. The second confessor will have its fine reduced by 50%, but the third will take the full force of the OFT’s sanctions. This could lead to intriguing situations – cartel members simply won’t know if their associates are ratting them out to get off without a fine. Better (or worse) still, a cartel member could decide to turn “states’ evidence” only to find that other members of the group have beaten the company to it, leaving it to face the full force of the fine. To round off the image of cartels as crime syndicates, executives who are thought to have obstructed an investigation in any way, particularly by trying to destroy documentary evidence, can be liable to criminal prosecution and imprisonment. Hughes cites one case in Germany where competition investigators entered a building, but staff cut off the power to the lifts while they were between floors to allow filing cabinets to be spirited away. In the UK, that will be a criminal act. But amongst all this fear of dawn raids and huge fines, one thing should be remembered: cartels are generally bad for business – as the trade secretary Stephen Byers’ high-profile attacks on “rip-off Britain” show. “In general I find that commercial practices that adhere to competition law reduce risk, reduce management time wasted, and recognise economic reality,” Hughes points out. “In general terms the economic reality is that what companies really need today are much more open logistical and distribution arrangements.” And as one FD, one of the few who said they would benefit from the legislation, told us, “Competition is fundamental to economic success.” VOLVO’S LUCKY ESCAPE The most high profile case to be brought under existing competition rules in recent months has been that of Volvo Car UK Ltd (VCUK). While vertical agreements – between members at different levels within a supply chain – are in theory exempt from the Act, if there is price fixing, the OFT will take an interest. In the Volvo case, it transpired that VCUK was prepared to penalise dealers which stepped outside of an agreement not to discount cars beyond a certain level. This agreement was forged at meetings between the dealers that were addressed by VCUK. In this case, then, there were transgressions in both the vertical agreements between VCUK and the dealers (where VCUK would penalise dealers unwilling to be part of the cartel) and horizontal agreements between those dealers not to compete on price below a certain level. Under the Resale Prices Act (1976), manufacturers can’t specify prices at the retail level; and under the Restrictive Trade Practices Act (1976), VCUK and the dealers should have told the OFT about the restrictions that were placed on the commercial freedom of the dealers to set prices themselves. The Competition Act will encompass both these eventualities, and more. In a global business (like the car industry) companies will have to be doubly careful: existing EC Treaty provisions already state that manufacturers are not allowed to restrict lower levels of the supply chain from exporting to specific countries (where their goods might be priced at a higher level). Both e-commerce (where national boundaries are broken down customers can find out about pricing elsewhere in the world and order goods from overseas more easily) and currency blocs (the euro will provide price transparency) will ensure that even if the Act and associated EC regulations are seen as overweening, at least the market is pulling in roughly the same direction. Meanwhile, Volvo has had a lucky escape. By making an explicit agreement to abide by specific terms of the Resale Prices and Restrictive Trade Practices Acts, it has escaped official censure. If the case had come to light after 1 March, both VCUK and its dealers may have been in for severe fines. ACTING ON THE ACT: WHAT COMPANIES SHOULD BE DOING BEFORE 1 MARCH Director General of Fair Trading John Bridgeman has made it clear that companies which at least try to remain within the new rules on competition will be treated more leniently than those which don’t. And companies which come forward to confess their sins will also be treated lightly. Edge Ellison’s Paul Hughes recommends that companies take a few relatively simple steps towards compliance – they will help ensure they aren’t stung too badly when the Act comes into force. These are best broken down into general measures for compliance and specific areas to watch in the two main areas of the Act, Chapter I (Agreements) and Chapter II (Abuse of Dominant Position). General points Hughes stresses that simply paying attention to the issue now may save huge costs later on. Companies should: – Set up a competition compliance programme, preferably under the supervision of a director – Check all existing agreements, both within their supply chain and particularly horizontally, for sign of breaches of the Act – Brief key members of staff on how to handle a possible investigation – this includes receptionists who will be the first to “greet” investigators in the event of a raid – Brief all employees on the basic strictures of the Act to avoid getting into damaging agreements and to ensure documents are properly filed and don’t contain “unfortunate” language – Consult commercial lawyers if there is any doubt at all – Consult the OFT and/or the European Commission – they will give guidance and will take into account the fact that advice was sought in the event of a case being brought – Confess immediately if your company is in a cartel, price-fixing arrangement or any other potentially anti-competitive agreement. The OFT has said it will waive the fine for the first member of a cartel which confesses; the second will have a 50% fine, but later confessors will face the full fine. Chapter I “If you’ve got a suspect agreement – that is, an agreement that potentially is within Article 81 (the EC regulation) or Chapter I – then you have to give some thought as to whether you want to notify the OFT or the European Commission,” Hughes says. “Most people are pretty loathe to do that, since there’s a cost.” Remember that there are exemptions under the Act, so you should, particularly if you’re putting together a non-vertical agreement, think about the sort of characteristics it should possess if it’s to qualify for an individual exemption. “The requirements are that it should improve production or distribution; promote technical or economic progress; allow consumers a fair share of the resulting benefits; and it shouldn’t impose any more onerous restrictions than are necessary to confer the relevant pro-competitive benefits.” Agreements where the aggregate market share of participants is below 25% may also be exempt. Chapter II “Watch out for regional dominance; be aware of your product market; be aware of your market share; and ask yourself whether your practices are objectively justifiable and transparent,” Hughes advises. “Particular practices that are going to be considered under the Competition Act – and which haven’t really had too much focus in the past – are: pricing – there’s far more, and more restrictive, case law under EC rules on pricing than there is under UK precedents; refusals to deal; and discount structures that secure all of a major part of the purchases of a particular customer without objective justification.” Clearly, companies in “dominant” market positions are far more vulnerable under the Chapter II provisions. Hughes cites the example of a dominant Irish sugar manufacturer which chose to give customers buying French sugar special discounts. This fell foul of European Commission regulations, since it affected interstate trade. But Chapter II will now make this an offence on a regional or national basis within the UK. “That means that dominant undertakings are in a difficult position when it comes to pricing, because their reductions in prices either have to be focused away from customers being targeted by competitors, or they have to be across the board and uniform, which obviously leads to much greater reduction in profit,” Hughes points out. “The rule is that if you’re selling below your average variable cost, then that is presumed to be predatory pricing; if you’re selling below total cost with a predatory intent, that is predatory pricing, although they actually have to prove intent there. “People need to be aware that they can be dominant in the spare parts for their products, rather than just in the products themselves,” Hughes continues. “It all goes back to awareness of market share; awareness of language and documentation you generate; awareness that if you are generating documentation with lawyers, it should be kept in a separate file marked “privileged and confidential” – in-house council in the UK enjoys lawyer/client privilege in the same way as private practitioners.” This will prevent investigators seizing documents which may be vital to a case brought under the Act.