This is the fourth in a series of newsletters on
competition law developments in England and Wales. This
edition covers a court judgment which considers the use
of competition law as a “shield,” a new criminal cartel
investigation by the Office of Fair Trading (OFT), and
new joint merger guidelines published by the OFT and
Competition Commission (CC).
High Court Considers Use of Competition Law as
On July 7, 2010, the English High Court handed down a
judgment concerning a post-termination restrictive
covenant in a franchise agreement for the manufacture,
sale and servicing of industrial hoses, fittings and
components in part of the UK. The case is an example of
the attempted use of UK competition law as a defence
(shield) against a breach of contract claim involving
this very common type of business arrangement. It
demonstrates the willingness of a UK court to engage in
such issues, but also the level of evidence it will
require to see in order to make a determination.
The post-termination restrictive covenant applied for
one year and required the franchisee, within the
geographic area of the agreement, not to "be engaged or
concerned or interested in any capacity whatsoever in
any business which carries on a business similar to or
which competes with the [business of the franchisor]."
The franchisee, upon being sued for breach of this
provision, sought to avoid liability on grounds which
included that it infringed UK competition law, and
specifically the UK equivalent of Article 101(1) of the
Treaty on the Functioning of the European Union (TFEU)
(ex-Article 81(1) EC Treaty) contained in the UK
Competition Act 1998.
The judge pointed to EU case law which had held that
a post-termination restraint on competition in a
franchise agreement may, but will not necessarily, fall
outside Article 101(1), and that this question will
depend upon whether the post-termination restraint is
essential to prevent the risk that know-how and
assistance provided by the franchisor to the franchisee
will, after termination, be used to aid the franchisor's
competitors. This type of know-how must be distinguished
from know-how of a general type provided to, for
example, experienced retailers.
The judge went on to state that the case law calls
for a "cautious, case-specific, analysis." It was
necessary to consider the evidence as to the know-how
and assistance which was in fact routinely provided by
the franchisor to its franchisees generally, and also
that provided to the particular franchisee in question.
The judge concluded that the level of know-how and
assistance provided amply justified a post-termination
restraint for the purpose of protecting the franchisor
against the risk that it might be used by competitors,
and that the particular terms of the restraint in this
case were not too wide. The material included, on the
basis of the evidence provided, technical assistance,
business management assistance, and a comprehensive
description of the way in which to run a business which
would be attractive to customers.
Although not necessary to decide the case, the judge
also considered the theoretical applicability of the
exemption contained in the UK equivalent of Article
101(3) TFEU, should the restraint in fact infringe the
equivalent of Article 101(1). He concluded that this
exemption would apply, since the various headings were
each satisfied. The agreement contributed to improving
the production or distribution of industrial hoses, the
restraint did not eliminate competition in respect of a
substantial part of the products in question (there are
other competitors), and the restriction was
indispensable in that the franchisor would not have
provided the know-how and assistance in the first place
without the protection of the post-termination
OFT Launches Criminal Cartel Investigation
On Sept. 16, 2010, the OFT confirmed that it is
investigating “suspected cartel activity” in the UK
involving commercial vehicle manufacturers. There are
two separate investigations: (1) a civil investigation
against companies under the UK Competition Act 1998; and
(2) a criminal investigation against an individual or
individuals under the UK Enterprise Act 2002 cartel
offence. Earlier that week, the press reported that the
OFT had raided Daimler/Mercedes-Benz in the UK, and had
arrested and bailed one individual (who was later
This was a significant move by the OFT, as following
the collapse of the British Airways (BA) criminal trial
on May 10, 2010, it will proceed very carefully in
relation to criminal cartel investigations. Since the BA
defendants had pleaded not guilty, that case would have
required a UK jury for the first time to decide on the
applicability of the cartel offence, and in particular
its requirement of "dishonesty" on the part of the
In 2008, three UK executives were sentenced under the
UK cartel offence to between two and a half and three
years' imprisonment for their involvement in a global
cartel relating to marine hoses. Those were the first
convictions under the UK cartel offence, but the
individuals had pleaded guilty.
In the present case, the OFT is therefore likely to
consider that it has good evidence in relation to any
alleged activities by the parties and any individuals
allegedly involved. Philip Collins, chairman of the OFT,
commented at the 2010 ABA/IBA International Cartel
Workshop in Paris that for a UK criminal investigation
to be launched "the right evidence and cases [need] to
come along" and that the OFT needs to "choose cases
carefully" and "exploit [the] good cases very
carefully." In addition, he indicated that the OFT is
keen to target individuals under the criminal powers
available to it, as this is the "only way to get [the]
message right up the chain."
If an individual is found guilty of the UK cartel
offence, he faces up to five years in prison and/or an
unlimited fine, as well as the possibility of a director
disqualification order. It is not clear whether a
company has made use of the OFT's leniency programme,
but in addition to corporate protection, that can
protect employees from criminal prosecution and
Regulators Publish Joint Merger Assessment
On Sept. 16, 2010, the OFT and CC published updated
74-page joint merger guidelines. In the area of merger
control, the OFT is the UK's first stage regulator, and
the CC carries out detailed (second stage) reviews.
The guidelines set out the questions the CC and OFT
will consider when reviewing mergers, how they define a
“relevant merger situation,” what is meant by a
“substantial lessening of competition” (SLC), and the
criteria and methodology used when assessing mergers.
The guidelines also deal with public interest cases
(such as defence mergers, where special considerations
can arise). Key revisions to existing guidance include:
- An explanation of the concept of “theories of
harm” and a commitment to use such theories in
assessing whether or not an SLC has been created.
- A shift in emphasis toward the direct assessment
of effects on competition, and away from a detailed
assessment of market definition.
- More detail in the sections on the
counterfactual, barriers to entry, non-horizontal
effects and efficiencies.
The CC and OFT worked closely with their counterparts
in the United States and with the European Commission.
It may be recalled that very recently (Aug. 19, 2010),
the U.S. Department of Justice and Federal Trade
Commission jointly issued new horizontal merger
guidelines, which the agencies claim better reflect
their actual practices, provide more clarity and
transparency, and will provide businesses with a greater
understanding of how the agencies review transactions.
As compared to the 1992 Horizontal Merger Guidelines,
and as with the new UK guidelines, the new U.S.
guidelines place heightened emphasis on the competitive
effects of a merger.
This is the first time that the OFT and CC have
worked together to produce a single set of guidelines,
but there is also a current joint OFT/CC project on the
design of surveys, and a joint commentary on retail
mergers is under discussion.
More generally, this is an interesting time in UK
merger control policy. The UK government elected earlier
this year, indicated in its post-election (May 20, 2010)
document "The Coalition: Our Programme for Government,"
that it "will review the range of factors that can be
considered by regulators when takeovers are proposed."
It has also recently been reported that the government
is actively considering a merger of the OFT and CC – an
idea which has been mooted for a long time, and one
which would be seen by many as long overdue.
Finally, a government-appointed body (Independent
Commission on Banking) is currently investigating the
banking system, including the issue of concentration
amongst banks, and the UK Parliament’s Treasury
Committee has launched its own inquiry into “competition
and choice in the banking sector.” Developments will
arise out of these investigations in 2011, which are
unlikely to be welcomed by the banking industry.