England & Wales Competition Law News

March 14, 2011

This is the seventh in a series of newsletters on competition law developments in England and Wales. In this edition, we report on a rare example of judicial consideration of the “blue pencil” severance test; allegations of abuse of dominance in the fuel card services sector; a reminder of the ease with which information exchange infringements can arise; and useful new guidance on first phase merger remedies.

Draft Agreements Carefully – Court Considers Effect of a Clause being Found Void

The basis of EU and UK competition law, as it applies to agreements, is that if a clause is on balance anticompetitive then it is void. The question then becomes: What is the impact of this on the agreement?

This question has not been the subject of much (reported) litigation in the UK. Therefore, when judgments appear, they are of wide interest to lawyers dealing with English law- (and other common law-) based contracts. A recent example is Francotyp-Postalia Ltd v. Whitehead and others (February 2011). This case related to the common law restraint of trade doctrine, but the principles to be applied when provisions are found to be void as a result of infringing competition law are the same.

The case concerned alleged breaches of post-termination restrictive covenants in a franchise agreement. The parties accepted that one of these covenants, a non-compete clause relating to a particular area, was too wide and therefore unenforceable as written. The court was asked to consider (only) whether part of the clause could be “severed” so as to cut back the restriction to one that was enforceable.

This meant that the court had to consider the impact of the so-called “blue pencil” severance test on the agreement. Under this test, the offending clause or part of a clause is struck out or severed, and whether the remainder of the agreement survives is then determined. This determination is made on the basis of well-known rules, paraphrased by the judge in this case as follows:

“[The contract will survive if] first the unenforceable provision [can] be removed without the necessity of adding or modifying the wording of what remains. Second there [must remain] consideration [i.e. value from both sides] . . . Third one then looks at the overall impact on the contract as a whole to determine whether or not removal does not change the contract so it becomes not the sort of contract the parties entered into at all.”

In the present case, because of the clause’s wording, it was in principle possible to strike out or sever part of the territorial non-compete clause to make it narrower in scope and therefore enforceable. However, the judge held this would necessarily change the scope of other restrictive covenants in the agreement, since the drafting of the clauses was linked. In addition, a basic (linked) principle of law was infringed; when a court is asked to apply the blue pencil test, it will not make a new contract for the parties. The territorial restrictive covenant could therefore not be severed in part so as to make it enforceable (which, as noted, was the sole question asked of the court).

It is notable that the agreement included a standard severance clause allowing for deletions to clauses, and for periods and areas of application to be reduced in the event a clause was found unenforceable for any reason. However, the judge dismissed this as doing nothing more than repeating the principles referred to above (even though arguably, it did go further than this).

The clear message is to carefully consider possible severance when drafting restrictions, and in particular, to make sure that the individual restrictions are broken down so that each is fully self-contained. In addition, clients must be advised of the possible consequences of a finding that a clause infringes competition law and cannot be severed.

OFT Investigates Alleged Abuse of Dominance in Bunker Fuel Card Services Market

On 25 February 2011, the UK Office of Fair Trading (OFT) issued a statement of objections (preliminary statement of its case, to which the recipient can reply) alleging that CH Jones abused a dominant position in the UK market for the provision of bunker fuel card services to direct bunkering customers, typically heavy goods vehicle (HGV) fleet operators. The OFT also alleges that CH Jones used its dominant position in that market to anticompetitive effect in the UK market for the provision of pay-as-you-go (PAYG) fuel card services to customers with HGV fleets. According to the OFT, both alleged infringements of competition law took place as a result of the use of exclusive agreements with bunker fuel sites.

The case is interesting as the OFT rarely proceeds in abuse of dominance cases, and because it relates to two markets, on only one of which is CH Jones allegedly dominant. For the rules on abuse of dominance to apply, there must be a link between the dominant position and the alleged abuse. This can arise where an abuse has effects on a market other than the dominated market (which appears to be the allegation in this case). In addition, it is possible for abusive conduct to take place on a market which is separate but closely related to that on which the dominant position is enjoyed (as established by the seminal Tetra Pak II case before the European Court of Justice).

Bunker fuel cards are payment cards for diesel and typically used by big truck fleets. Companies will purchase large quantities of fuel upfront, generally from a wholesaler or oil major. The bunker fuel card operator then arranges for this diesel to be delivered to refueling sites. Drivers use the bunker fuel cards to access this fuel from the various sites on the bunker network, with the customer paying a handling charge to the bunker fuel card provider based on the amount of diesel drawn down. Bunker fuel card operators also buy diesel for resale to smaller customers who use cards on a PAYG basis when visiting sites, or allow resellers to do the same using their networks.

The OFT’s allegation is that CH Jones has engaged in an exclusionary strategy. The main element of this is the use of exclusive agreements with bunker fuel sites with the objective of excluding a rival fuel card supplier, UK Fuels, from the markets for direct bunker and PAYG cards, thus restricting competition. The OFT launched an investigation after being contacted by UK Fuels.

OFT Investigates Information Exchange Among Insurers Resulting from Use of Market Analysis Software

On 13 January 2011, the OFT announced that seven insurance companies and two IT software and service providers have provisionally agreed to limit the data they exchange between them after the OFT raised competition law concerns. This follows an OFT investigation which identified an increased risk of price coordination among motor insurers using a specialist market analysis tool by Experian called “Whatif? Private Motor.”

The OFT commented that “the investigation potentially has [wide] implications [for the insurance industry in the UK] as the Experian tool is just one of a number of similar products used throughout the insurance industry.” Further, it stated “we urge companies using [these tools] to ensure that they are complying with competition law.” Clearly, to the extent that similar tools are used in other industries (in the UK or elsewhere in the EU), the same concerns could arise.

The tool allowed insurers to access not only the pricing information they themselves provided to brokers, but also pricing information supplied by other competing insurers. The nine companies under investigation are proposing to address the OFT’s concerns by giving formal commitments that will result in the insurers no longer being able to access each other’s individual pricing information through “Whatif? Private Motor.” Instead, they propose to exchange pricing information through the analysis tool only if that information meets certain principles agreed with the OFT. These would require the pricing information to be anonymised, aggregated across at least five insurers, and already “live” in broker-sold policies.

The OFT will now consult on the commitments. A decision by the OFT to accept the commitments will not include any statement as to the legality or otherwise of the conduct by the parties (so no third party damages actions can be based on the decision), and there will be no fine.

The OFT has also been investigating a different type of information exchange case in the banking sector in the UK. In September 2010, it sent a statement of objections (SO) to Royal Bank of Scotland and Barclays concerning alleged breaches of competition law through the disclosure of confidential and commercially sensitive future price information in relation to loan products (on the fringes of social, client or industry events or through telephone conversations). Barclays admitted to the practices in exchange for immunity from fines, and RBS agreed to pay a reduced fine of GBP29 million. The SO was a procedural step required before the formal infringement decision can be taken. The OFT issued its formal decision on 20 January 2011, bringing the investigation to a conclusion.

New OFT Guidance on First Phase Remedies and “Exceptions to the Duty to Refer”

On 14 December 2010, the OFT published revised guidance on its ability to accept first phase remedies in a merger case. The guidance also covers the “exceptions to the duty [on the OFT] to refer a merger” to the Competition Commission (CC) for a detailed (second phase) review.
The part of the guidance dealing with remedies sets out the familiar requirements (also relevant before the European Commission under the EU Merger Regulation (EUMR)) that first phase merger remedies are “clear cut” and “capable of ready implementation.”

In addition, and again as under the EUMR, the OFT indicates that it prefers structural solutions, typically the sale of a business. However, it confirms that “in appropriate cases, the OFT will consider other structural or quasistructural undertakings in lieu of reference. A structural remedy other than divestiture might comprise an amendment to intellectual property licences, for example so as to grant a divestment purchaser a perpetual and royalty-free licence.” In practice, the parties will have to produce very good arguments that these types of remedies will work and an upfront buyer is more likely to be required in such cases.

Behavioural remedies are recognised as possible in suitable circumstances, particularly for mergers raising vertical concerns and those taking place in markets in which there already exists a significant degree of regulation.

The part of the guidance dealing with “exceptions to the duty to refer” deals with situations in which a first phase merger approval may be obtained from the OFT despite it finding prima facie competition concerns which would normally justify a second phase investigation (by the CC). (The “duty to refer” is the tortuous UK legislative language dealing with the start of a second phase review.)

The most important exception is that for de minimis mergers. Where the annual value in the UK of the market(s) concerned is, in aggregate, less than GBP3 million, the OFT will generally not consider a second phase to be justified “provided that there is in principle not a clear-cut first phase remedy available.” In other words, somewhat strangely, if, despite the market(s) being de minimis, a suitable first phase remedy could in the OFT’s view still be offered to deal with the competition concerns, it would still have to be offered by the parties (failing which, there could be a second phase investigation).

The new guidance sits alongside the recently published OFT/CC joint substantive assessment guidance for mergers. The two bodies are likely themselves to be merged later this year as part of the UK government’s cost-cutting measures.