UK: Enterprise Act 2002: Market Investigations

The market investigation provisions of the Enterprise Act 2002 replace the monopoly provisions of the Fair Trading Act 1973 (the "FTA"). The market investigation provisions of the Act ensure that designated UK competition authorities continue to have the power to investigate markets without the need to show, as would be required for investigation under Chapter II of the CA98, an agreement between the firms in the market or any abuse of a dominant position (held either by a single firm or multiple firms).

The new market investigations regime – like its predecessor – comprises two stages: an initial investigation of potential problems in a market by the Office of Fair Trading (the "OFT"), and, if necessary, a reference to the Competition Commission ("CC") for fuller investigation. If the CC investigation results in adverse findings, there is scope for remedies to be adopted. They are essentially forward looking, and do not have the effect of declaring firms’ past conduct to have been unlawful. In this respect, the regime is in stark contrast to the prohibitions in the CA98.

The following summary describes the market investigation provisions of the Enterprise Act, and draws attention to the key differences from the previously applicable monopoly provisions of the FTA.

There are essentially three ways in which a market investigation reference may be made, namely by:

• the OFT (which may make a reference either of its own volition or pursuant to a "super complaint", see following) (S 131);

• the sectoral regulators (comprising the Director General for Telecommunications, the Gas and Electricity Markets Authority, the Director General for Water Services, the Director General of Electricity Supply for Northern Ireland, the Director General of Gas For Northern Ireland, the Rail Regulator and the Civil Aviation Authority) (S 131); and

• the appropriate Minister, in specified circumstances (S 132).

Primary responsibility for making market investigation references will lie with the OFT. In anticipation of this role the OFT established a division entitled the "Markets and Policy Initiatives Division" under the leadership of Jonathan May to monitor markets and conduct preliminary investigations to determine whether markets might warrant investigation. This formalises the position that pre-existed under the FTA.

The Enterprise Act establishes a new procedure for the making and handling of "super-complaints". Section 11 of the Act requires the OFT, upon receipt of a complaint from a designated consumer body, to publish its response to the complaint within 90 days, stating whether or not it will take action in response to the complaint. (As at the date of publication, the Secretary of State has not published an order listing the consumer bodies that will have the power to make such complaints.)

A designated body will be able to make a complaint if it concludes that there is a feature, or combination of features, of a market in the UK that appears to be significantly harming the interests of consumers. For these purposes, consumers comprise individuals who receive the goods or services other than in the course of business – essentially end users acting as consumers (S 183(1)).

These provisions of the Enterprise Act will therefore create a strict timetable pursuant to which the OFT must fast-track its response to complaints made by designated consumer bodies.

The circumstances in which a market investigation reference may be made to the CC are as follows.

In summary:

• if the OFT is to make a reference, it must be satisfied that the conditions specified at S 131 of the Act are met;

• if a relevant Minister is to make a reference, he/she must suspect that the same conditions as specified at S 131 are met and either (1) the OFT must have decided not to make a reference under S 131, or, (2) if the Minister has provided the OFT with information relevant to the question of whether or not a reference should be made, he/she must be not satisfied that the OFT will make a reference within a reasonable delay (S 132).

The conditions identified in the Act which must be met if the OFT is to have the power to refer matters to the CC for investigation are as follows:

• 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 a part of the UK (S 131(1)); and

• the market must not have formed the basis of any undertaking given in lieu of a reference within the last 12 months (S 131(4)(a)); and

• the market must not have been the subject of a ministerial reference to the CC which has not yet been determined (S 131(4)(b)).

A "feature" of the market in the UK for goods or services is defined to cover:

• the structure of the market concerned or any aspect of that structure;

• any conduct (whether or not in the market concerned) of one or more than one person who supplies or acquires goods or services in the market concerned; or

• any conduct relating to the market concerned of customers of any person who supplies or acquires goods or services (S 131(2)).

It is to be noted that, if these tests are met, then the OFT has a power, rather than a duty, to make a reference. It is also to be noted that the "features" of the market which may form the basis of a reference are far more widely defined than the "conduct" of potential monopolists, which was the basis for intervention under the rules of the FTA on complex monopolies.

In deciding how to exercise its power to make a market investigation reference, the OFT is obliged to act rationally, by reference to relevant criteria. The OFT’s Guidance notes state that the OFT will only make references to the CC when in addition to the reference test at S 131 being met, each of the following criteria are also met:

• it would not be more appropriate to deal with the competition issues identified by applying CA98 or using other powers available to the OFT, or, where appropriate, sectoral regulators;

• it would not be more appropriate to address the problem identified by means of undertakings in lieu of a reference

• the scale of the suspected problem, in terms of its adverse effect on competition, is such that a reference would be an appropriate response to it;

• there is a reasonable chance that appropriate remedies will be available.

The OFT’s Guidance sets out the questions which the OFT will be expected to address in determining each of these issues and a brief overview of the more interesting issues raised in this context is set out following.

The OFT should be expected to weigh up whether it is more appropriate for an investigation to be conducted under the CA98 or any other powers available to the OFT, and in due course, the OFT will be obliged, following "modernisation" of the application of Articles 81 and 82 EC, to apply EC law rather than national law in certain circumstances.

• CA98 investigation vs Enterprise Act market investigation

• The impact of modernisation 

• the agreements do not restrict competition within the meaning of Article 81(1) EC; or 
• the restrictive terms of the agreement meet the requirements for an individual exemption under Article 81(3) EC; or

• the terms are covered by an EC block exemption.

The guidance on market investigations issued by the OFT indicates that, following entry into force of the modernisation regulation, "the OFT will adapt its current procedures to ensure that it applies Articles 81 and 82 in parallel with national competition law. When dealing with a suspected competition problem, the OFT will consider first both whether it might involve ...infringement of Article 81 and/or Article 82. For this reason it is likely to be rare that a reference to the CC will include agreements within the meaning of Article 81(1) except …[where the OFT has power to withdraw the benefit of a block exemption because]… both the following conditions are met:

• The territory of the member State, or a part of it, has all the characteristics of a distinct geographic market; and
• The agreements in question have effects incompatible with Article 81(3) in the territory of the Member State." (see paras 2.13 to 2.18 inclusive).

The recitals to the modernisation regulation note that "it is necessary to provide that the application of national competition laws to agreements, decisions or concerted practices within the meaning of Article 81(1) may not lead to the prohibition of such agreements, decisions and concerted practices if they are not also prohibited under Community competition law. The notions of agreement, decisions and concerted practices are autonomous concepts of Community competition law covering the co-ordination of behaviour of undertakings on the market as interpreted by the Community courts." (recital 8).

In future, it will therefore be necessary for parties and their legal advisers to consider, at an early stage, whether the features of the market which give rise to competition concerns could and should be addressed under Article 81 EC, rather than the market investigation provisions of the Enterprise Act.

S 154 enables the OFT to accept undertakings in lieu of a reference in circumstances where the OFT would otherwise have the power to make a reference (see above) and the undertakings remedy/mitigate/prevent any adverse effect on competition/any detrimental effect on customers resulting from the adverse effect on competition.

Where undertakings are given, that has the effect of preventing the OFT (or the appropriate Minister) from making a reference to the CC on the same matters for a year (unless the undertakings are breached or the OFT has been supplied with false or misleading information in a material respect). As under the FTA, third party rights are respected as prior to the acceptance of undertakings, the OFT is required to publish details of the proposed undertakings inviting third parties to comment on them.

The OFT’s Guidance indicates that undertakings in lieu of a reference are not expected to be common, since the OFT will not generally have conducted a sufficiently detailed investigation of the competition problems in a market to enable it to determine what remedies are a suitable solution.

The OFT indicates that it will make a reference only where it has reasonable grounds to conclude that the adverse effects on competition resulting from the features of the market are significant. The OFT has not outlined the test which will determine significance in this regard but the following factors will be considered:

• the size of the market, although the mere fact that a market is small will not rule out a reference;

• the proportion of the market affected by the feature giving rise to adverse effects, although no absolute figures are provided to determine when the proportion will be large enough to justify a reference; and

• whether the feature is a lasting characteristic of the market or whether it is of a more transient nature.

If the OFT considers that appropriate remedies will not be available to remedy adverse effects arising from features of the market, it will not make a reference. However, as noted above, it is likely to be rare that the OFT will have a sufficiently complete understanding of the market from its preliminary investigation to reach such a conclusion unless the OFT is familiar with the market and the particular features from a previous investigation so there may be limited cases which will not be referred for this reason.

Some cases may avoid a reference on this basis. They could include:

• markets which have been found to be international in scope – such that remedies imposed in the UK are unlikely to have much impact; and/or

• cases where the features which give rise to adverse effects are the result only of the applicable laws, regulations or government policies in place in the market. The OFT could recommend changes to such laws, regulations and policies without the need for a full reference.

The OFT has powers similar to those which were available to the DGFT under SS 44 and 46 of the FTA. If the OFT believes that it has the power to make a reference, then, in order to assist the OFT to determine whether a reference should be made or undertakings accepted in lieu of a reference, the OFT may:

• Give notice to any person requiring him to attend a meeting to give evidence to the OFT (or its nominee);

• Give notice to any person requiring him to produce any documents which are specified or described in the notice or fall within a category specified or described in the notice or are in that person’s custody or control; and/or

• Give notice to any person requiring him to supply the OFT with estimates, forecasts, returns or other information specified/described in the notice.

The OFT may not compel anybody to give or produce evidence which he could not be compelled to produce in civil proceedings (section 174(8)). This rule is intended to permit the withholding of various privileged communications.

Intentional failure to comply with the requirements of a notice (without reasonable excuse) is an offence which is punishable by a fine and/or to imprisonment for up to 2 years (section 175(3)).

Similar powers are now also granted to the CC in respect of the conduct of their market investigation references. Previously, the CC had a power under S 85 of the FTA to require the attendance of witnesses and the production of documents and a power to fine witnesses only to the extent that the information provided was false or misleading (S 93B), the Enterprise Act empowers the CC to fine witnesses for non-compliance with a request that he/she supply evidence or documents (S 176).

Any market investigation reference is required to specify:

• The enactment under which it is made;

• The date on which it is made; and

• The description of goods or services to which the feature or combination of features concerned relates (S 133).

The reference is not required to specify the feature or features which give rise to the reference itself. 

The reference may also be framed so as to confine the CC’s investigation into only particular parts of the market which have given rise to the reference: for example, the reference may limit the CC’s investigation into particular modes of supply of relevant goods or services, or the particular place of supply/acquisition or by reference to the persons from whom or to whom they are supplied.

The OFT (or the referring Minister or sectoral regulator) may subsequently vary the content of the reference. The OFT’s Guidance notes that the CC may, whilst pursuing the investigation, discover that the description of the goods or services in the reference requires modification, e.g. where goods or services not specified in the reference but related to the reference goods or services are affected by the same features and merit investigation. In these circumstances the CC would approach the OFT and request a variation to the reference, to which the OFT would be expected to accede. Alternatively the OFT or the Minister may be alerted to a deficiency in the original reference and believe that a variation is justified. In these circumstances, the OFT, or the Minister, as appropriate, would be required to consult with the CC prior to making the variation (S 135).

Finally, the Enterprise Act reserves a power for the Secretary of State to intervene in a market investigation (either at the stage when the market is being considered by the OFT or following a reference to the CC) where the market raises a "public interest consideration". At present, the only matter specified as being a public interest consideration are the interests of national security (S 153). In practice, the cases of Government intervention are likely to be rate.

The CC is required to take the following decisions:

1. whether there is an adverse effect on competition, which is presumed pursuant to S134(2) where any feature or combination of features, of the relevant market(s) prevents, restricts or distorts competition in connection with the supply or acquisition of goods/services in the UK (or part of the UK); and
2. if there is an adverse effect on competition,

- whether the CC itself should take action to remedy, mitigate or prevent the adverse effects on competition or any detrimental effect on customers resulting from the adverse effects, or

- whether the CC should recommend that another party take action to remedy, mitigate or prevent the adverse effects on competition or any detrimental effect on customers resulting from the adverse effects, and 

- in either case, if action should be taken, what the action should be and what is to be remedied, mitigated or prevented (S 134(4)).

For these purposes, the Act specifies that there will be a "detrimental effect on customers" if a market is characterised by higher prices, lower quality or less choice of goods/services or less innovation. It is not clear how this will be measured and whether the comparison will be with some hypothetical perfectly competitive market, or some other "norm".

The CC is also required by the Act to have regard to the need to achieve as  comprehensive a solution as reasonably practicable to the adverse effects identified and also to take account of any impact on relevant customer benefits of proposed action (where customer benefits are the opposite of the detrimental effects identified above).

The CC’s investigation and report is required to be undertaken and published within two years of the date of the reference (S 137). The report is required to contain the following content:

• the CC’s decisions on the questions identified in S 134 (i.e. listed at (i) and immediately above);

• the CC’s reasons for the decisions; and

• the background information which the CC considers appropriate to include (S 136).

 What happens after publication of the CC’s market investigation report?

If the CC’s report concludes that there is one or more adverse effect on competition, then the CC is under a duty to take action to remedy, mitigate or prevent the adverse effect/detrimental effect on customers in a manner consistent with the decisions set out in the report (S 138), but subject to an exception where material changes have taken place since publication.

To this end, the CC should consider whether interim undertakings are necessary as S 157 of the Enterprise Act grants the CC a new power, following publication of a report, to accept undertakings "for the purpose of preventing pre-emptive action" i.e. action which thwarts the CC’s ability to obtain final undertakings which remedy the adverse effects identified.

Unlike the position under the FTA, it is the CC rather than the Minister that has the responsibility (rather than the previous Ministerial discretion) either to accept undertakings from appropriate persons (following negotiation between the parties and the OFT as specified in S 163), or to make an order unilaterally imposing obligations on the persons identified in the order (where the content of the order is determined by the scope of Schedule 8 to the Act) (SS 159 and 161).

If undertakings are accepted by the CC, the undertakings take effect from the date of acceptance and continue to take effect until varied, superseded or released by the CC. The CC is under a duty to consider representations made in relation to the question of varying or releasing the undertakings.

Once the CC has accepted undertakings, or imposed an order, the OFT is charged with responsibility for monitoring compliance with the terms of the undertakings/order. The OFT is also under a duty, from time to time, to consider, amongst other matters, whether an undertaking is still appropriate and, if not, whether parties may be released from the undertaking or the content of the undertaking can be varied, superseded or revoked (S 162). The OFT is charged with advising the CC on its conclusions but it is the OFT rather than the CC that is required to take such further action as it considers appropriate in this regard (S 162(4)).

If the CC (or if appropriate, the Minister) discovers that the undertakings accepted by it are not being adhered to, or that the undertakings were accepted on the basis of false or misleading information, the CC (or Minister) may make an order under S 160, where the order may unilaterally impose on the parties an obligation of the sort identified in Schedule 8.

If there continues to be non-fulfilment of the undertakings accepted by the CC, or adherence to the order imposed by the CC, an enforcement order may be drawn up and directions may be made in the enforcement order requiring the recipient to comply with the order. Non-observance of these directions would give rise to:

• action by any person who sustains loss or damage as a result of the breach of duty to comply with the order (S 167(4));

• civil proceedings, at the instigation of the OFT, or the relevant authority, for an injunction or any other appropriate relief or remedy (SS 167(6) and (7)).

The changes to the procedure and powers of the competition authorities made in the Enterprise Act are intended to address the long-standing criticisms of the FTA regime on market investigations:

• the changes are intended to remove the scope for political influence in the process by reducing/removing the ability of the Executive to participate/have the final say in the decision taken;

• the grounds for an investigation, and the adverse effects which are identified and ultimately the subject of undertakings or an order, are pure competition grounds rather than the more expansive "public interest" test of the FTA (although there is separate provision for the Secretary of State to take steps to introduce specific public interests considerations into the CC’s investigation in some cases); and

• the remedies adopted should be directed at addressing competition detriments. Accordingly the CC is under an obligation to ensure that the remedies adopted are comprehensive and practicable. It also has a discretion to consider whether the remedies will have any adverse effects on customer benefits which result from the same feature as are the subject of the remedy.

Although the Act sets a clear framework to achieve these objectives, it is too soon to determine whether the objectives will be achieved in practice.

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