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 Shield
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 non-compete.
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 named).
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 individuals charged.
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 disqualification.
Regulators Publish Joint Merger Assessment Guidelines
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.