Know the Rules or Pay the Price: Firms and Competition Law Enforcement Thursday 12 th March 2009

1. Know the Rules or Pay the Price:Firms and Competition Law Enforcement Thursday 12th March 2009 A presentation by the ESRC Centre for Competition Policy An event in the ESRC Festival of Social Science www.ccp.uea.ac.uk

2. 2 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 www.ccp.uea.ac.uk

3. 3 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 www.ccp.uea.ac.uk

4. 4 Plan of the Afternoon • Cautionary Tales • Merger Law and Policy • Cartels and Other Agreements • Abuse of Dominance and Private Enforcement www.ccp.uea.ac.uk

5. 5 Cautionary Tales www.ccp.uea.ac.uk

6. 6 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 • “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 www.ccp.uea.ac.uk

7. 7 The British Airways/Virgin Atlantic Case • 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 • 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 www.ccp.uea.ac.uk

8. 8 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 www.ccp.uea.ac.uk

9. 9 But we are the Public Sector! • OFT decision 18.11.08 • Cardiff Bus engaged in predatory conduct intended to eliminate a competitor, 2 Travel • Cardiff Bus responded to the introduction of a new no-frills bus service by 2 Travel, by introducing its own no-frills bus services • Key facts • New service made a loss for Cardiff Bus • Shortly after 2 Travel's exit from the market Cardiff Bus withdrew its own no-frills services • Note • Cardiff Bus is owned by Cardiff Council • Cardiff 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 www.ccp.uea.ac.uk

10. 10 They Thought it Was All Over • 2003: JJB part of cartel in 2001-02; fined £6.7 million for fixing prices of England and Man U football shirts • 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 £1m • The case secured just £100,000 in compensation for consumers www.ccp.uea.ac.uk

11. 11 Merger Law and Policy Catherine WaddamsESRC Centre for Competition Policy and Norwich Business School www.ccp.uea.ac.uk

12. 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 12 Merger Rules • Two stage process: UK and EU rules slightly different • unlike some other areas of Competition Law www.ccp.uea.ac.uk

13. 13 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 www.ccp.uea.ac.uk

14. 14 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 www.ccp.uea.ac.uk

15. 15 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 www.ccp.uea.ac.uk

16. 16 Overview of the Universe of Merger Remedies www.ccp.uea.ac.uk

17. 17 Cartels and Other Agreements Andreas StephanNorwich Law School and ESRC Centre for Competition Policy www.ccp.uea.ac.uk

18. 18 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 www.ccp.uea.ac.uk

19. 19 The Law: What is Illegal Chapter 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 www.ccp.uea.ac.uk

20. 20 How Far Does the Law Go? • 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 www.ccp.uea.ac.uk

21. 21 Establishing an Infringement The Competition Authority may: • Prove infringement by analysis of the market • Problematic • Woodpulp (1985) – other explanations for observed behaviour • Collect physical evidence • Most infringements established in this way • Leniency programme induces self reporting www.ccp.uea.ac.uk

22. 22 Reasons why Cartelists Meet • Reaching agreement • Implementing • Monitoring for cheats • Changes in cost and demand • International Arbitrage www.ccp.uea.ac.uk

23. 23 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) www.ccp.uea.ac.uk

24. 24 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 www.ccp.uea.ac.uk

25. 25 Abuse of Dominance Morten HviidNorwich Law School and ESRC Centre for Competition Policy www.ccp.uea.ac.uk

26. 26 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 www.ccp.uea.ac.uk

27. 27 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 share • 50% generally enough but can be lower • Can be local (e.g. Cardiff buses) • It is not “having” it, it is “abusing” it! www.ccp.uea.ac.uk

28. 28 Abuse • It is not “having” it, • Success through hard work and by providing consumers with what they want is good • It is “abusing” it! www.ccp.uea.ac.uk

29. 29 Examples of Abuse from the Act • Exploitative • Excessive pricing • Predatory pricing • Discriminatory terms including pricing • Exclusionary • Discounts and rebates • Tying • Refusal to supply • Essential facilities www.ccp.uea.ac.uk

30. 30 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 www.ccp.uea.ac.uk

31. 31 Private Enforcement Morten HviidNorwich Law School and ESRC Centre for Competition Policy www.ccp.uea.ac.uk

32. 32 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 www.ccp.uea.ac.uk

33. 33 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 www.ccp.uea.ac.uk

34. 34 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 www.ccp.uea.ac.uk

35. 35 Group Action • To spread costs/risks, versions of the “class action” have been proposed • Designated body • Consumer 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 www.ccp.uea.ac.uk

36. 36 Overall Conclusion www.ccp.uea.ac.uk

37. 37 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 may • Prevent you from infringing the law • Help you protect yourself against others • Help you deal with strategic claims by others www.ccp.uea.ac.uk

38. 38 Questionnaire Results and General Discussion Morten Hviid Andreas Stephan Catherine Waddams www.ccp.uea.ac.uk