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Electives: Commercial Part 1 – Competition

Electives: Commercial Part 1 – Competition
Commercial Law in practice covers a wide area of matters, all with a central basis in contract law. As pretty much any transaction will involve a contract of some sort, the kinds of law that a commercial lawyer could come across vary considerably! The commercial law elective typically focuses on some more specialist areas that could come into play in a number of contracts. At my provider, this included the sale and supply of goods and services, intellectual property and competition law. Each area is quite detailed, so I am going to cover each in a series of posts, kicking off with competition law.

Competition law is concerned with preventing ‘anti-competitive’ activity. In a free market, market pressures (the competitors, buyer/consumer habits, availability of supply, etc.) generally regulate how businesses operating in that market behave; e.g. if a business prices itself too high, buyers will go to a competitor with a lower price. However, if a group of businesses that would normally be in competition agree to work together to counteract market pressures, this is anti-competitive. Equally, if one business has such a large market share it can act however it likes, despite what buyers or competitors are doing, and it abuses its position, for example, by setting prices so low all its competitors go out of business – this is anti-competitive. Both will eventually reduce the number of businesses in a market, reducing competition to the detriment of the consumers. This is quite a simplistic view, but it should give you an idea of what competition law is all about.

Commercial Law in practice covers a wide area of matters, all with a central basis in contract law. As pretty much any transaction will involve a contract of some sort, the kinds of law that a commercial lawyer could come across vary considerably!

There are two regimes for competition law: EU and UK. Both prohibit anti-competitive agreements and abuse of dominant market position; the distinction is the geographical area they cover. Articles 101 and 102 of the Treaty of the Functioning of the European Union apply where the activity affects trade between EU Member States, the Competition Act 1998 applies where trade within the UK is affected. I am not going to repeat the law here, as I would expect you to refer to it in the exam. What I will do is provide some (hopefully) helpful tips that I find useful to think about when considering competition law.

In the exam you are likely be given a scenario and analyse (and potentially advise on) whether there are competition law implications. I would recommend you approach it systematically, as each aspect needs to be ascertained before a breach of competition law is established. I would suggest you need to answer the following questions as a minimum:

  • EU or UK?
  • Is the activity an anti-competitive agreement or abuse of dominant market position?
  • If agreement, is it horizontal or vertical?
  • Is it covered by a block exemption?
  • What is the market?
  • Is it covered by de minimis?
  • Is competition affected by the activity?

The order in which they are covered will depend on the question – for example, you will need to consider the market definition early to be able to work out if a business has a dominant market position, however, you might not need to consider it until the end if it is an agreement.

Some of these questions involve quite difficult concepts, enshrined in lengthy case law. I would recommend reading the case law to really get to grips with it but I have tried to explain them simply below.

Vertical and horizontal agreements

Vertical and horizontal describe the respective positions to an agreement. Horizontal agreements are agreements between competitors at the same level of the market. Vertical agreements are between businesses at different levels of the market, e.g. a supply agreement between a manufacturer and distribution agent, or wholesaler and retailer. Vertical agreements are considered less likely to have an adverse effect on competition as the parties are not directly competing against one another. As a result, vertical agreements that do not contain ‘hardcore’ restrictions (these are listed in the block exemption document and include provisions such as price fixing) may have the benefit of the Vertical Agreements Block Exemption (VABE). Agreements that come under VABE are exempt from competition law.

Vertical and horizontal describe the respective positions to an agreement.

Establishing whether the agreement is vertical or horizontal will let you know whether you need to consider VABE. A particular favourite of the elective (as it covers agency and sale and supply of goods) are distribution agreements. These are vertical agreements that may be covered under VABE but quite often have hardcore restrictions within them. As a result there is a whole raft of case law surrounding distribution agreements and competition law. A distribution agreement should ring the VABE bell in your mind!

De minimis

De minimis relates to agreements of minimal effect; the parties concerned have such small market share (EU) or low turnover (UK) the agreements are considered to have little effect unless there are hardcore restrictions. Whether the agreements are de minimis will depend on the defined market. If it is possible (and it is likely to be) for the market to be very narrow or wide, depending on how you analyse it, explain your reasons for both in the exam.

Market definition

The first step in defining a market is to identify what the initial product

Market definition is key in relation to dominance; the size of the market will determine if a business holds a large share and the size of the market is decided by how you describe it: the market for 15mm nails is quite small whereas the market for things that could hang a picture on a wall is considerably larger. The first step in defining a market is to identify what the initial product is, i.e. the particular product or services being supplied. The next step is to establish the parameters of the market in which that product is supplied. There are three types of market which, when considered in together will determine the market: these are product, geographic and temporal markets.

The product market describes the products that could be considered a viable substitute for the product being supplied. The substitutability is considered from both a buyer and a supplier’s point of view; demand and supply substitution. Demand side substitution relates to whether a consumer will switch from product A to product B if the price of product A goes up; the consumer considers the products to be substitutable, e.g. if the price of buses goes up, I will catch the train. The two services are in competition with each other and form part of the same market. Supply substitution relates to the ability of the supplier to change from supplying product A to product B, e.g. if a manufacturer is making cakes, how easy is it for them to start making biscuits. If the manufacturer can easily switch, the cakes and biscuits may be in the same market.

It is important when looking at product markets to think about the intended use of the products. High end products will often not be interchangeable with cheap; a buyer of a Gucci coat is unlikely to consider a coat from Primani interchangeable (however you spell it!). The leading case in market definition ruled that bananas are not interchangeable with, and therefore in a separate market to, apples and other fruit, as a result of its unique characteristics (the case is called United Brands and well worth a read to get a handle on market definition).

Geographical markets relate to the area in which a consumer will buy the product. Some are very wide – people are increasingly using the internet as an alternative to high street shopping, which could make the geographical market international! However, geographical markets can be very small, depending on the ability of the consumer to travel. Airports are often considered to be a market of their own, as travellers have restrictions on their movement. The market may be determined in relation to a particular feature; the market for student residences is usually limited to the geographical area around a particular university for example – students studying at Cardiff will not want a halls room in Bristol, even though the rooms are practically identical. Quite commonly the market will be defined to a campus, because people at that site are unlikely to travel elsewhere for convenience reasons; examples could be a hospital, university campus or office estate.

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defining a market can be quite tricky to nail down

[/one_fifth][four_fifth_last]Temporal markets apply where there is a time limit as to when a product is typically used; mince pies have a temporal market as they are only consumed during the festive season.

Unsurprisingly, defining a market can be quite tricky to nail down. It is dependent on consumer behaviour and, although we can hazard a pretty good guess as to what this would be, without consultation and survey data, you cannot be certain. I would advise covering all bases when discussing markets. Explore both narrow and wider market definitions and explain the implications of both. It may be that the business only has a dominant market position if the market is narrowly defined, therefore will only breach competition law by its actions if the market is that narrow.[/four_fifth_last]

The competition aspect of the commercial elective may also cover enforcement. Both the Office of Fair Trading and the European Commission can investigate and enforce competition law. The penalties can be quite severe – businesses can be fined up to 10% of group worldwide turnover. There is also reputational damage and the possibility of action for damages from businesses. In the UK, the cartel offence under the Enterprise Act 2006 carries a maximum of 5 years sentence and/or an unlimited fine for individuals. Overall, pretty bad news! The penalties will be key in any advice to a client relating to competition law; they need to appreciate the risk they are taking if they disregard your advice. With this in mind, it is important to remember to mention it in the exam.

In terms of preparation for the exam, I would recommend reading as much as you can to really understand the underlying concepts. You will need to refer to the legislation wording but if you are relying on your textbook to remind you of the basic concepts you are highly likely to miss something. If you are having trouble understanding something, the OFT has a great series of guides available to download from its website. I still use these now and they are really good at explaining the law and often point you towards useful cases as well. Some are a little out of date, so cross check with your textbook before relying on them but they do explain the principles very well. The OFT also has a handy video which you can stream – it is aimed at lay people, so a bit of a noddy’s guide!

Competition law is quite close to my heart as it is an area I am covering in my current seat. I find it very interesting and the work involved is varied – we are asked to advise on anything from sale agreements to development of new products. Unlike some other practice areas it is highly law based, everyone in the department has legislation, textbooks and case law close to hand! It may not be for everyone, but as it could affect practice areas from intellectual property to corporate and even property, it is really worth getting a handle on.

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