England & Wales Competition Law News

March 26, 2010

This is the first in an occasional series of newsletters from McGuireWoods LLP reporting on competition law developments in England & Wales. In this newsletter we report on recent appeals to regulatory decisions, two abuse of dominance cases and three recent publications by the Office of Fair Trading (OFT).

Another Successful Appeal against a Regulator’s Decision

On 11 February 2010, the UK Competition Appeal Tribunal (CAT), by agreement with the UK Competition Commission (CC) and third-party appellant CTS Eventim, quashed the CC’s report into the Ticketmaster/Live Nation merger. This followed an appeal lodged by CTS Eventim on grounds of procedural fairness.

The CC cleared the merger in its report, but CTS Eventim, which had, prior to the merger announcement, reached an agreement with Live Nation to provide ticketing services for the latter’s live music events and venues in the UK, brought an appeal to the CAT on various grounds. One of the grounds was that it had been denied a fair hearing. The CC, having considered the grounds, took the view that the challenge based on lack of a fair hearing was arguable in the circumstances of the case, and that it would not be efficient to argue this issue before the CAT. It therefore asked the CAT to quash the report, so that the CC would immediately be able to reconsider the case and report again.

This CAT proceeding is just one of a number of recent appeals to the CAT against decisions of UK regulators in relation to mergers and market investigations. Another high-profile example concerned the CC’s report on the British Airports Authority (BAA) airports market investigation. The CAT upheld an appeal by the BAA that the investigation was tainted by apparent bias on the part of one of the members of the investigating team, and partially quashed the report. The CC is seeking to appeal to the UK Court of Appeal.

In addition to victories in the CTS Eventim and BAA cases, third parties have had recent successes in several other cases on appeal. It is therefore clear that the authorities in the UK can successfully be challenged in relation to merger and market investigation (as well as general competition law) decisions, and that possible grounds of appeal are wide. There is no doubt this will only encourage others to try their hand.

Alleged Abuse of Dominance by Reckitt Benckiser

On 23 February 2010, the OFT announced it had issued a statement of objections (SO) concerning an alleged abuse of a dominant position by Reckitt Benckiser (RB) in the market for the UK National Health Service (NHS) supply of alginate and antacid heartburn medicines. An SO sets out the OFT’s case under the UK Competition Act 1998, and gives the alleged infringer an opportunity to respond. It is not published, but any third party which might be able materially to assist the OFT may request a non-confidential version.

The alleged abuse relates to RB’s “Gaviscon” brand of heartburn and indigestion products. The OFT alleges that RB sought to restrict competition to its Gaviscon brand by withdrawing and de-listing its NHS packs of Gaviscon Original Liquid from the NHS prescription channel before the publication of the generic name for the product.

This meant that when a doctor searched using prescribing software for “Gaviscon” prescription packs, the software only identified “Gaviscon Advance Liquid,” which is patent protected until 2016 and not subject to generic competition, and not “Gaviscon Original Liquid,” for which an open prescription (listing the generic name and allowing the pharmacy to dispense the branded or generic equivalent) could otherwise be provided.

An OFT official commented that “This case raises significant and complex competition issues relating to the supply of prescription drugs to the NHS.”

The case follows various investigations at EU level into alleged activities by pharmaceutical companies that the European Commission considers may hinder the entry of generic versions of pharmaceutical products in the EU. It is also interesting because the OFT rarely proceeds in abuse of dominance cases. The last OFT decision finding an abuse of dominance was reached in November 2008, and concerned predatory pricing by a local bus service provider in one city in the UK (the Cardiff Bus case).

National Grid Abuse & GBP15 Million Fine

Also on 23 February 2010, there was a rare example of the English Court of Appeal (CA) giving full consideration to a competition law case. This was an appeal by National Grid plc (NG) against a judgment of the CAT that had upheld a ruling by the UK Gas and Electricity Markets Authority (GEMA) that NG had abused its dominant position by entering into long-term contracts for the provision of domestic gas meters.

The CA upheld the CAT’s judgment concerning abuse of dominance, but reduced the fine on NG from GBP30 million to GBP15 million – it already having been reduced by the CAT from the original GBP41.6 million. The reduction to GBP15 million was principally to reflect the fact that “the [CAT] placed insufficient weight on [GEMA]’s involvement in the history [of the matter].”

NG formerly had a monopoly of the supply of gas meters and ancillary services, and worked closely with GEMA and its customers and other gas suppliers in attempting to devise a lawful scheme to meet a new situation in which competing meter operators had entered the industry. This provided “mitigation of considerable weight.” The novelty of the situation was also relevant.

The CA’s judgment is also significant for its consideration of two particular arguments raised in relation to the infringement, and that apply generally in abuse cases:

  • Abuse and “normal competition.” The CAT was entitled not to isolate and consider as a preliminary determinative issue the fact that a particular form of contract features in the market under conditions of normal competition, but could look at matters in the round in deciding whether the conduct was abusive. In other words, even if a particular contract is in principle consistent with normal competition, it does not automatically follow that its use is not abusive.
  • Was there an anti-competitive foreclosure effect? In analysing this issue, there is no rule requiring the use of a benchmark in every case, “let alone a benchmark that will tell one precisely where the line between lawful and unlawful conduct is to be drawn.” However, the use of counterfactuals as a tool of appraisal is plainly permissible and of potential value. What is appropriate by way of counterfactual is a matter of judgment for the decision maker.

GEMA issued a press release in which it welcomed the judgment, and pointed out that the effect of the CA’s ruling is that suppliers will be free to renegotiate the terms of contracts with NG and also that it opens the door to claims for damages against NG by competing meter operators, as the competition law regime allows.

Framework for Applying Choice & Competition to Public Markets

On 19 March 2010, the OFT published a guide for policy makers considering using choice and competition in the delivery of public services. The intent is to provide a framework for assessing where and how the use of choice and competition can be most effective. The guide argues that in order for choice and competition to work effectively, policy makers need to be particularly aware of three key lessons:

  1. Consumer behaviour needs to be understood. Many public services have only recently been opened up to choice, and some users are not aware that choice exists. Many public services are complex, and users do not necessarily use or know how to interpret publicly available information. This can make the role of intermediaries in advising individuals very important.
  2. Implementing good exit mechanisms is vital. It can be very difficult, practically and politically, to close down public services such as individual schools and hospitals, even if they’re performing badly. If competition is to work well, policy makers should seek ways to allow new entrants, or existing market participants with a strong track record, to take over managing these services.
  3. User choice and competition between providers need to function effectively in order to secure overall benefits for users. Enabling choice on its own is not enough, while potential competition between providers will not be effective unless users can effectively exercise that choice.

Links Between Competitors including Minority Interests & Contracts for Differences

On 22 March 2010, the OFT published a report on the potential implications to competition from minority share ownerships (MSOs) in competitors, interlocking directorships between competitors, loans to competitors and contracts for differences (CfDs) relating to a competitor. According to the OFT, contracts for differences (or derivative contracts in general) have not previously come up for debate in competition policy circles.

Unsurprisingly, the overall conclusion of the report is that each of the issues investigated can give rise to competition concerns, but this depends on the circumstances. CfDs were found to give rise to similar unilateral concerns, as do MSOs in cases in which the purchaser of the CfD uses it to “go long” on the share price of a competitor. Coordinated effects concerns can arise where the purchaser of the CfD instead “goes short.” However, the conclusion is that, save in bidding markets, the impact of CfDs on the ability of competitors to sustain collusion is not clear. A short position can also be used to reduce the cost of exclusionary behaviour (e.g. predation), because gains are made when a competitor’s share price reduces.

Market Studies & Report on 2003 Pharmacy Market Study

The OFT has carried out a large number of market studies in recent years, and several are currently under way. These are carried out under the OFT’s general information gathering powers under the UK Enterprise Act 2002, and are used to analyse a particular market with the aim of identifying and addressing any market failure.

These studies can lead to significant consequences for businesses, therefore need to be taken seriously. The potential outcomes of a market study include: (1) enforcement under the competition rules (UK Competition Act 1998); (2) a reference to the CC for a detailed market investigation; (3) recommendations for changes to the law; (4) consumer education campaigns; and (5) a clean bill of health for the market in question.

The OFT has committed to publish an independent evaluation of at least one market study per year. On 22 March 2010, it published a report on the outcome of the OFT’s 2003 market study into the pharmacies sector. The 2003 study recommended that control of entry regulations for community pharmacies should be removed completely. In response, the government resolved to ”move cautiously in the direction recommended by the OFT,” with partial liberalisation in one part of the UK (England).

The report found that liberalisation has shortened travel times and waiting times, and has improved access to lower priced over-the-counter medicines. Additional administrative and business costs exist, but overall quantified net benefits are estimated at GBP12-20m a year. The report also highlights a number of non-quantified benefits including extended opening hours and greater choice for consumers, with the number of pharmacies operating in England rising by nearly 9% (many had feared that enabling easier entry would lead to large numbers of pharmacies closing).