UK: Competition provisions of the Enterprise Act 2002

This guide provides an overview of the main competition provisions of the Enterprise Act which are expected to come into effect in Summer 2003. This overview will be supplemented by a series of topic focussed papers covering the implications in practice of particular aspects of the Enterprise Act, such as the criminalisation of cartels.

The Enterprise Act radically reforms the UK’s competition regime in relation to cartels, merger control and market investigations and builds on the Government’s White Paper "Productivity and Enterprise: A World Class Competition Regime", in which competition between firms is described as a key driver of productivity and the Government sets out its ambition to create a competition regime which is highly effective by global standards.

The competition provisions in the Enterprise Act are based on the following key principles:

• Competition decisions should be taken by strong, pro-active and independent competition authorities
• There should be a strong deterrent effect
• Harmed parties should be able to obtain real redress
• The regime should root out all forms of anti-competitive behaviour
• There should be greater international consistency and co-operation

The Act provides that the office of the Director General of Fair Trading will be abolished and its functions will be transferred to the Office of Fair Trading (OFT), which will be designated as a new corporate authority. The OFT will be governed by a board, comprising John Vickers, the current DGFT, as Executive Chairman, Professor Richard Whish (a competition law academic), Rosalind Wright (Director of the Serious Fraud Office), Lord Blackwell (Chairman of the Centre for Policy Studies), Christine Furnish (previously acting deputy director general of Oftel) and Penny Boys (currently Deputy Director General of Fair Trading). Once John Vickers’ term expires, the OFT will separate the roles of Chairman and Chief Executive in line with good corporate governance principles.

The Act establishes the Competition Appeal Tribunal (CAT) in place of the existing Competition Commission Appeal Tribunal. The new CAT will be legally separate from the Competition Commission.

The independence of the competition authorities is intended to be strengthened by restricting the involvement of Ministers in the decision making process.

One of the most controversial features of the new legislation is the new criminal offence for engaging in cartel activity. Although the Competition Act 1998 strengthened the sanctions which deter anti-competitive behaviour, there was a concern that the penalties for engaging in cartels, which fell only on businesses, were not enough to deter such actions. The Government believes that American and other experience suggest a strong case for introducing criminal penalties, including custodial sentences, for individuals who engage in cartels, alongside a new civil sanction of director’s disqualification.

The Enterprise Act introduces a new criminal offence for those who dishonestly engage in cartels. Individuals who knowingly engage in cartel activity will be subject to criminal sanctions. Companies continue to be subject to the existing civil law regime of the Competition Act 1998. The criminal offence covers price fixing, limitation of production or supply, market sharing and bid-rigging. It is confined to horizontal agreements (agreements between undertakings at the same level in the supply chain).

The criminal offence carries a maximum sentence of five years imprisonment and/or an unlimited fine. One of the effects of creating a new criminal offence is to make similar offences committed abroad potentially extraditable. The most likely countries to request extradition from the UK will be the US and Canada, which both have fully developed criminal sanctions for cartel participation. There will be a leniency programme, under which the OFT will have the ability to issue ‘no-action letters’ to protect informants from prosecution if certain conditions are met. Investigations will be handled primarily by the Serious Fraud Office.

The new law will also allow the OFT to request disqualification of directors of companies which have been involved in an infringement of competition law. The Company Directors Disqualification Act will be amended and will provide that the court must make a Competition Disqualification Order (CDO) against a person if the court considers that the following two conditions are satisfied in relation to that person:

a An undertaking which is a company of which that person is a director commits a breach of competition law (Chapter I or II of the Competition Act 1998 and/or Articles 81/82 EC Treaty), and

b The court considers that person’s conduct as a director makes him or her unfit to be concerned in the management of a company.

When deciding whether the second condition is satisfied the court must consider whether that person’s conduct contributed to the breach, whether he/she had reasonable grounds to suspect that the breach was taking place and took no steps to prevent it, or whether he/she did not know but ought to have known that the breach took place. The maximum period of disqualification is 15 years.

The Enterprise Act makes substantial changes to the UK merger control regime. A new competition-based substantive test, the substantial lessening of competition test (SLC test), will replace the current public interest test. The OFT and the Competition Commission have published advice and information (currently in draft format) on how the new SLC test will operate. The ‘customer benefit’ exception will make it possible for the competition authorities to clear a transaction that may result in a substantial lessening of competition, where they believe the transaction will bring benefits to the relevant customers of the merged entity. Customer benefits are narrowly defined and must be in the form of lower prices, greater innovation, greater choice or higher quality.

The criteria used to determine which mergers qualify for investigation will also be amended. The current £70 million worldwide assets test will be replaced with a UK-based turnover test of £70 million, relating to the turnover of the enterprise being taken over. The current alternative 25% ‘share of supply test’ will remain unchanged.

The new rules will bring an end to the current system whereby the Secretary of State is responsible for adopting a final decision on the question of references to the Competition Commission and on ultimate remedies if the Commission finds against the merger. This responsibility will be transferred to the relevant competition authorities, unless there are ‘exceptional public interest issues’ at stake. The Enterprise Act currently only defines one public interest issue, national security, but the Secretary of State can intervene by serving an intervention notice where she believes that a merger raises other public interest considerations. Ministers may also intervene if one of the parties involved is a relevant government contractor.

In terms of timetable under the new regime, where notification is made using an official Merger Notice, the OFT will have a maximum period of 30 working days (in contrast to the current 35 working days) to make a decision. The Competition Commission will have a maximum of 24 weeks to complete its investigation and, if it finds an adverse effect on competition, make its decision on remedies (extendable by no more than 8 weeks in exceptional circumstances). Negotiating and finalising the detailed terms of the remedies with the parties will usually take place following the publication of the Competition Commission’s report.

There is a new appeal mechanism in respect of merger decisions with a right to apply to the CAT for a statutory judicial review.

The Enterprise Act replaces the scale and complex monopoly provisions of the Fair Trading Act 1973 with a new regime for market investigations.

Such investigations are likely to focus on competition problems arising from un-coordinated parallel conduct by several firms or industry wide features of a market in cases where the OFT does not have a reasonable suspicion of breach of the Competition Act.

The "monopoly situation" concept of the old regime is replaced with a more general competition test. In order to make a reference the OFT must have "reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the UK or part of the UK."

The role of the Secretary of State and other Ministers is reduced and primary power to make market investigation references is allocated to the OFT. The Secretary of State has a reserve power to make market investigation references, either alone or jointly with other Ministers. Such references are restricted to cases in which the Ministers have reasonable grounds for suspecting that a feature or combination of features of a market are preventing, restricting or distorting competition and are dissatisfied with the OFT’s decision not to make a reference. There is also provision for the Secretary of State to intervene in cases in which public interest considerations may arise (eg national security).

Where the Competition Commission identifies an adverse effect on competition, it is under a duty to take such action as it considers reasonable and practicable to remedy the situation, by making an order or seeking undertakings. The Competition Commission has the power to make any necessary orders on its own authority, without further reference to the Secretary of State. The only exception is where the Secretary of State has issued a public interest intervention notice.

Parties to an inquiry who are aggrieved by a decision of the Competition Commission may apply to the Competition Appeal Tribunal for a judicial review of that decision.

The Government wishes to encourage third parties who are harmed by infringements of competition law to seek legal redress. The victims of anti-competitive behaviour will be able to bring claims for damages before the CAT where a breach of UK or EC Competition law has been established. In addition previous findings of infringement by the regulators will be binding in all courts. This will potentially save years of interlocutory argument and means that proceedings can concentrate on the questions of causation and loss rather than there being any question that the claimant has to re-prove liability.

Claims for damages may also be brought by specified bodies such as the Consumer Association on behalf of a group of named individual customers. The Act also gives certain designated consumer bodies the right to make a ‘supercomplaint’ where they consider that there are market features, such as a market structure or conduct of firms within it, that may be harming consumers to a significant extent. The aim is to encourage the OFT to give priority to matters that may directly harm consumers.

© Herbert Smith 2003

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