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Friday, 19 July 2013

Competition policy as a cattle market

As part of a package of consultation documents relating to the new Competition and Markets Authority (CAM), BIS has published its view of the strategic priorities that should inform the work of the CMA, which it refers to as the "Strategic Steer" or "Steer" for short (https://www.gov.uk/government/consultations/competition-regime-cma-priorities-and-draft-secondary-legislation) . This is non-statutory, high level guidance to the CMA which is meant to last for a period of three years; in this case 2014-17 and a first version of it is presented.

The consultation document points out that providing competition authorities with more independence has been a key part of reform in the UK and elsewhere and that stakeholders regard independence as a key element to an effective regime. The provision of a Steer must, however, lesson the independence of the CMA because they are intended to have regard to this guidance (as well as being subject to various reporting requirements). As Julia Black put it in a different context, "Politics is often a key driver of what the regulator does."

The Steer asks the CMA to do four things:

  • Identify markets where competition is not working well
  • Enforce antitrust rules robustly
  • Play a key role in challenging government where it is inadvertently creating barriers to competition
  • Work with and through partner agencies to deliver positive competition outcomes

The most notable omission from the Steer is that it has nothing to say about merger policy (enforcement does not include merger control). This is not, in itself, an unreasonable position to have, although it is surprising that there are no comments in relation to process, given the dissatisfaction that has been expressed with the speed of UK merger control, most recently in relation to hospital mergers.

In relation to the first task, the CMA should identify emerging competition problems early and increase the number and speed of cases for the benefit of consumers and the wider economy. In deciding whether or not markets are working well the CMA should take into account consumer behaviour, especially where there are information problems or asymmetries of information. The government considers that consumer behavioural issues should be central to the CMA's analysis of whether markets are working well. The CMA should also take into account dynamic competition through innovation and the development of new business models. As part of this, the CMA should be willing to consider potential competition concerns in business to business markets; including the differences in power between firms in the supply chains (is this a reference to supermarkets?). Finally, the CMA should assess specific sectors where enhanced competition could contribute to faster growth. The examples given are knowledge intensive sectors, financial services and infrastructure industries.

As regards anti-trust enforcement, it is suggested that the CMA should have an appropriate mix of complex and simpler enforcement cases in order to maximise its impact. This is perhaps a suggestion that the CMA ought to take up more localised and smaller cases than, arguably, the OFT has done in the past. So we will perhaps see more cases like the one relating to Mercedes Benz commercial vehicles in the north of England, parts of Wales and Scotland.

As its third task, the CMA is to play a key role in challenging government where it inadvertently creates competition problems. The government's view is that it commits to accepting the CMA's views on how to promote competition. What this actually means is that there will be a presumption that all recommendations will be accepted "unless there are strong policy reasons not to do so." So, for example, the outcome of the HBOS/Lloyds TSB takeover would presumably remain the same under this policy.

Finally, the CMA is supposed to work with and through partner agencies to deliver positive competition outcomes. This means it should engage in a broad strategic dialogue with regulators and look for opportunities to encourage effective competition either by carrying out its own work or supporting the regulators' work. It should also work with the sector regulators, specifically including the Financial Conduct Authority, to build up its sector capabilities and to share competition expertise including through joint enforcement work, training and research. The CMA should also maintain and enhance its international leadership position.

The tone of the Steer is striking. The CMA is treated as an arm of the state, or perhaps government, which has a role to perform in changing the way the economy works. It does not simply have a policing role but it is supposed to identify areas of the economy where there are competition problems, albeit not breaches of competition law, and provide solutions to these problems. Two areas in particular seem to be singled out for attention: financial services and those other industries which are subject to sector regulation. Knowledge intensive industries is an interesting, although uncertain, idea, which might include pharmaceuticals and the health services, to give just two examples. Furthermore, it is clear that the government wants to see more enforcement activity than has taken place in the past, as well as greater numbers of market studies and investigations.

The three year timespan for the Steer is problematic. Since this is a non-statutory document, there would be nothing to stop a new government in 2015 from revising it and this could be done in time for October 2015, following the timetable of this consultation. Even if the Steer ran its full three years, given the timescale of most activities by the competition authorities in the UK, any review will probably only encompass one round of decisions. For market investigations, in its consultation document on reform of the competition law regime, BIS estimated that the average time for a market investigation was three years. Although the aim of the new legislation was to speed up this process, it is unlikely to make a big difference and, in particular, it is going to be unlikely that a proper assessment of the effectiveness of any remedies stemming from a market investigation, starting at the beginning of a review period, can be done.

The publication of the Steer should be welcomed because, if the government is going to have general view about the direction of travel of the CMA, it is right that this should be published. It does represent a different approach to the competition authorities than has prevailed in the last decade. It will be interesting to see if the CMA can deliver in terms of greater enforcement activity and, if it does so, whether or not this will be welcomed by government and business. As the old saying has it, "Be careful what you wish for …"

Wednesday, 17 July 2013

Re thinking the de minimis rules

In the light of Case C-226/11 Expedia, judgment of 13 December 2012, the European Commission is consulting on a revision of the de minimis Notice (http://ec.europa.eu/competition/consultations/2013_de_minimis_notice/index_en.html). This is a sensible idea, particularly as there is some tension between the current version of the Notice and the case law of the EU courts. The Expedia case opens up the opportunity to align the Notice with the case law. There is to be no change in the market share thresholds beneath which agreements which may have the effect of restricting competition will be considered not to have an appreciable effect on competition and thus are outside of Article 101(1) TFEU. The major change is found in para, 12 where the Commission says that the market share thresholds:

"… do not apply to agreements which have as their object the prevention, restriction or distortion of competition within the internal market. For instance, as regards agreements between competitors, this means that the Commission will not apply this Notice to, in particular, agreements containing restrictions which, directly or indirectly, have as their object: a) the fixing of prices when selling products to third parties; b) the limitation of output or sales; or c) the allocation of markets or customers. Likewise, the Commission will not apply these market shares thresholds to agreements containing any of the restrictions that are defined or listed as hardcore restrictions in any current or future Commission block exemption regulation, which are considered by the Commission to generally constitute restrictions by object."


 

This statement is on the one hand in line with the Court's case law as it follows the Expedia case in taking the view that agreements with the object of restricting competition must always have an appreciable effect on competition. On the other hand, there is a problem because, as Advocate General Mazák pointed out in Case C-439/09 Pierre Fabre, the concept of an agreement with the object of restricting competition is different from that of a hardcore restriction and that just because an agreement, or a clause within it, does not meet the criteria for a block exemption, it does not follow that it is necessarily in breach of Article 101(1) TFEU. The word "generally" does not provide the Commission with a get-out, since the burden of proof under Regulation 1/2003 is on the authority alleging breach of the competition rules.


 

There are a number of responses to this document. The Expedia case has been criticised for being a backwards step insofar as a more economic approach to competition law is concerned (for one example see Pinar Akman at: http://tinyurl.com/pthbmtb ). The Commission's proposed new Notice will thus simply exacerbate the problem. This criticism can be overstated as all competition law regimes are a compromise between administrability and principles. It is not unreasonable to say that there are certain agreements which have no redeeming characteristics and, because of this, there is no point in having a discussion about their effects – they may not have any negative effects because of the parties' weak market position, but they have no redeeming characteristics and so no loophole should be allowed.


 

Leaving this point aside, there are potential problems with the Commission's approach. In order for this approach to work effectively, there should be a clear, and arguably limited, list of agreements which are considered to have the object of restricting competition. This is not the case, especially as some national competition authorities have taken an expansive approach to this category of agreements. In Expedia the contract at issue could have been characterised as single branding while in Case C-32/11 Allianz Hungaria at stake were contracts which offered incentives for selling other products. The issue approach is further muddied by the Commission's assertion that, as far as it is concerned hardcore restrictions, present or future, are to be considered the equivalent of agreements with the object of restricting competition. While this is true of some of the hardcore restraints, it will not necessarily be true for all of them. This is potentially an acute problem, as it seems unlikely that the Commission will spend its time and resources on small agreements with limited significance at EU level. Enforcement will therefore be in the hands of the national competition authorities who may have differing interpretations of what constitutes an object agreement.


 

This combination of approaches between the Court, the Commission and NCAs suggests that more, relatively smaller, agreements will be caught by Article 101(1) TFEU and the enforcement process. Given as well the decision in Case C-681/11 Schenker, where the Court was very unsympathetic to an argument that there should be no liability for clear anti-competitive activity which the undertakings thought, on the basis of legal advice, technically escaped the prohibition, there should be a strong incentive on undertakings to review any agreements which could arguably fall within EU competition law.