Competition law in the EU stems from Articles 81 and 82 of the Treaty. Article 81(1) prohibits arrangements, agreements or concerted practices between undertakings that have the object or effect of preventing, restricting or distorting competition. Article 82 prohibits the abuse of a dominant position which may affect trade between member states.

UK law reflects these Articles for trade within the UK by what are referred to as the Chapter 1 Prohibition and the Chapter 2 Prohibition in the Competition Act 1998.

Of agreements between undertakings which may affect trade in the UK and which have the object or effect of restricting competition with the UK or a part of the UK.

Infringement of either UK or EU law in this area renders the agreement void and unenforceable. The OFT may impose penalties of up to 10% of the worldwide turnover of the undertaking concerned. Where the combined turnover of the parties to an infringing agreement does not exceed £20M, (“small agreements”), the maximum penalty is reduced - except in the case of a price fixing agreement.

The Office of Fair Trading (OFT) considers that:

1...Infringement only exists only if an agreement has as its object or effect an appreciable prevention, restrict or distortion of competition (i.e. lesser agreements will fall outside the scope of enforcement or other action).

2...An agreement will generally have no appreciable affect on competition if the parties’ combined share of the relevant market does not exceed 25%, although there will be circumstances in which this is not the case. E.g. it:

Directly or indirectly fixes prices or shares markets; imposes minimum retail prices; or constitutes one of a network of similar agreements which have a cumulative effect on the market in question.

3...The minimum retail price and cumulative effect exceptions are most likely to apply to vertical (i.e. supplier/customer, manufacture/the wholesaler) rather than horizontal (i.e. competitor parties) agreements.

Of the abuse by one or more undertakings of a dominant position in a market which may affect trade within the UK.

4...Abuse: conduct may constitute an abuse if it consists in:

Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

Limiting production, markets or technical developments to the prejudice of consumers;

Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

Making 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 the contracts.

5...Market: relevant market has two dimensions:

The relevant goods or services (the product market);

The geographic extent of the market (the geographic market)

6...Dominance: the OFT considers that this is unlikely if market share is below 40% but could be established below that figure if other relevant factors (such as the weak position of competitors in that market) provided strong evidence of dominance.

Dominance has been defined by the European Court as “… a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of consumers."

7...The UK Competition Act and Article 81(1) each set out examples of agreements targeted by them, namely those which:

Directly or indirectly fix purchase or selling prices or any other trading conditions.

Limit or control production, markets, technical development or investment.

Share markets or sources of supply.

Apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.

Make the conclusion of contract 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.

This list is not exhaustive; any agreement that has an appreciable adverse effect on competition is likely to contravene the Chapter 1 Prohibition or Article 81(1), unless it meets the conditions set out in Article 81(3) and/or section 9(1) of the Competition Act – see below.

8...What is an appreciable effect on competition within the EU or the UK ? The European Commission considers that an agreement between undertakings will not appreciably restrict competition if:-

The aggregate market share of the parties does not exceed 10% on the relevant market or markets affected where the agreement is between competing undertakings, or

The market share of each party does not exceed 15% of the relevant market or markets where the agreement is between non-competing undertakings.

These thresholds go down to 5% in the case of a parallel network of agreements having similar effect.

9...The above tests do not apply and therefore agreements will always be anti-competitive where they:-

Directly or indirectly fix prices, share markets or limit production – where the agreement is between competing undertakings

As between non-competing undertakings the agreement contains a provision which

Limits a buyer’s ability to determine its resale price, or

Restrict a buyer operating at a retail level from selling to any end user in response to unsolicited orders (passive selling), or restricts active or passive selling by authorised distributors to end users or other authorised distributors in a selective distribution network, or

Restrict, by agreement between a supplier of components and a buyer who incorporates those components into its products, the supplier’s ability to sell the components and spare parts to end users or independent repairers not entrusted by the buyer with the repair or servicing of its products.

The above list describes agreements which are capable of having an appreciable effect even where the market shares fall below the thresholds explained above.

10...Within the UK, the OFT has regard to the European Commission’s approach, and is likely to follow in the UK the EC thresholds when applying Chapter 1.

11...The mere fact that the parties’ market shares exceed the thresholds above does not itself mean that the effect of an agreement on competition is appreciable; other factors have to be determined as well, for example the content of the agreement and the structure of the market or markets affected, entry conditions to the market, the characteristics of buyers and the structure of the buyers’ side of the market.

Examples of Agreements which might appreciably restrict competition

12...Agreements which have as their object or effect any of the following:

Directly or indirectly fixing prices

Fixing trading conditions

Sharing markets

Limiting or controlling production or investment

Collusive tendering (bid-rigging)

Joint purchasing or selling

Sharing information

Exchanging price information

Exchanging non-price information

Restricting advertising

Selling technical or design standards

13...Sharing markets may take place by way of territory, type or size of customer or in some other way. The OFT considers that such market sharing agreements by their very nature restrict competition to an appreciable extent.

14...Infringement of either UK or EU law in this area renders the agreement void and unenforceable. The OFT may impose penalties of up to 10% of the worldwide turnover of the undertaking concerned. Where the combined turnover of the parties to an infringing agreement does not exceed £20M, (“small agreements”), the maximum penalty is reduced, except in the case of a price fixing agreement.

15...There are a number of EC block exemptions covering specialisation agreements, research and development agreements, the motor vehicle sector, technology transfer agreements and vertical agreements and concerted practices. Agreements covered by an EC block exemption are not prohibited under the Competition Act Chapter 1 Prohibition.

16...Each party to the agreement must operate at a different level of the production or distribution chain; so an agreement between a component supplier, a manufacturer of the product and a wholesaler qualifies, but an agreement between the manufacturer and two wholesalers does not.

17...The block exemption relates only to the contract conditions concerning the purchase, sale and resale of the goods.

18...Block exemption will not apply to a vertical agreement where the market share of the supplier (or buyer, in the case of an agreement with an exclusive supply obligation) exceeds 30% of the relevant market. The market here means the relevant product and geographic markets; more than one market may be affected by any particular agreement.

19...Nor will it apply if the agreement contains any of the ‘hardcore’ restrictions.

20...Nor will it apply to non-compete restrictions unless specific conditions are met.

21...The market share of the buyer on the market in which it buys is relevant where the agreement contains an exclusive supply obligation. Otherwise the market share of the supplier determines whether the threshold is exceeded.

22...There are 5 hardcore restrictions any of which if present takes the agreement out of the exemption:

(1) Price fixing. Eg by straight imposition on the buyer of the price he can resell at, by fixing the maximum level of discount the buyer can give, or by intimidation, delay or cessation of deliveries if price levels are not maintained.

(2) Restrictions on the territory where the buyer can sell or to which customers he can sell. Note that an agreement can prohibit:

active sales by the buyer into an area designated for an exclusive seller (who could be the supplier itself);
a wholesaler selling to end-users;
distributors in a selective distribution system selling to unauthorised distributors where the system operates ;
a buyer of components supplied for incorporation from reselling them to the suppliers competitors.

(3) Restrictions on sales to end-users by authorised retail distributors in a selective distribution system (other than location of retail outlet).

(4) Restrictions on authorised distributors in a selective distribution system trading with each other.

(5) Restrictions on the manufacturer of components from selling the components as spare parts to end users, independent repairers and service providers.

23...The block exemption does not apply to the following restrictions but the remainder of the agreement may still benefit from it:

Non-compete obligations during the contract which exceed 5 years. This includes indefinite non-competes and those which are tacitly renewable beyond five years. If the buyer operates from the supplier’s building then the period of the occupancy is acceptable as the term for the restriction.

Non-compete restrictions after the contract term. These are acceptable if limited to one year after the contract, limited to the goods the subject of the contract and to the premises from which the buyer operated during the contract, and is necessary to protect the supplier’s know-how.

24...The OFT in the UK can withdraw the exemption, for cause, in respect of any particular agreement.

25...If an agreement does not benefit from the block exemption, the legal exception regime in Article 81(3) may apply.

26...Article 81(3) of the Treaty provides that Article 81(1) is inapplicable in respect of any agreement “which contributes to improving the production or distribution of goods or 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 attainable of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.”

27...Section 9(1) Competition Act is similar to the above except that the phrase “of goods” is not included. Thus, improvements in production or distribution in relation to services may also satisfy the exception condition. (The European Commission has in practice applied Article 81(3) to services by analogy).

28...This largely excludes from the Chapter 1 Prohibition in the UK the same types of agreement as the EC Block Exemption. The Chapter 1 prohibition does not apply to an agreement to the extent that it is a vertical agreement.

29...There is only one hardcore restriction, namely price-fixing.

30...There is no market share threshold - but dominance in a market may give rise to Chapter 2 issues.