UK: ‘Semi-Exclusive' Restrictions Could Be Considered Pro-Competitive

Last Updated: 1 February 2019
Article by Tripti Malhotra

Through its very recent decision in, Gascoigne Halman Ltd v Agents’ Mutual Ltd, the Court of Appeal ('CA'), has upheld the Competition Appeal Tribunal's ('CAT') findings, while strengthening the hand of any firm looking to impose 'semi-exclusive' obligations/restriction of choice, for so as long as the firm concerned is a new entrant in a particular market, looking to compete with the existing market leaders (Zoopla and Rightmove in the present case).

Interestingly, the CA has agreed with the CAT regarding the pro-competitiveness of such an obligation (especially in absence of market power) and that it was an ‘objectively necessary’ arrangement. The CA has noted that given the obligation's economic and legal context, it was legitimate for the CAT to rule out a 'by object' restriction, as it did not reveal sufficient degree of harm. This is in alignment with the CAT’s finding that the ‘limited exclusivity’ provided by the restriction does not have the object of restricting competition in the market, rather it was likely to increase competition between the existing players.

The restriction was considered as legitimate for the purposes of facilitating entry into a competitive market. The CA’s decision echoes that pro-competitiveness of such a restriction can be further justified if the nature of the market is two-sided, such as in the case of property portals, where the network effects are felt on both sides of the market.

The dispute

Agents' Mutual Limited ('Agents' Mutual'), an organisation owned by its estate agents, launched an online property portal called 'OnTheMarket', a new entrant in the market already led by other property portals such as Zoopla and Rightmove. Agents' Mutual subjected its members (advertisers/ estate agents) to a One Other Portal Rule, whereby its members could list their properties on only one other competing portal, and a Bricks and Mortar Rule, restricting membership to only those estate agents who had full service office-based facilities (as opposed to online business models).

Gascoigne Halman Limited ('Gascoigne') signed up as a member with OnTheMarket and, as a result, was subjected to the above two conditions. Gascoigne was subsequently acquired by Connells, which had a strategic relationship with Zoopla, and informed Agents' Mutual of its intention to advertise on both Zoopla as well as Rightmove. Gascoigne then listed its properties on both platforms, and Agents' Mutual issued proceedings against it for breach of contractual terms. In defence, Gascoigne contended that Agents' Mutual had infringed competition law through its 'One Other Portal' and 'Bricks and Mortar' rules, which had the effect of restricting choice and excluding competition. Gascoigne contended that the 'One Other Portal' rule was restriction by both object and effect, while the 'Bricks and Mortar' rule was challenged as a restriction by object.

The CAT's decision

In its decision of July 2017, the CAT decided in favour of Agents' Mutual and did not find the 'One Other Portal' and 'Bricks and Mortar' rules to be restrictive of competition, either by 'object' or 'effect'.

Restriction by object and Semi-Exclusive purchasing obligation

According to the CAT, for it to qualify as an 'object restriction', an agreement must by its very nature reveal a sufficient degree of harm to competition, having regard to its economic and legal context. In determining that context, the nature of services concerned as well as structure and functioning of the market must be considered. The CAT also noted that the parties' intentions may be relevant, but are not determinative.

The CAT then observed that "the rule is not one of absolute exclusivity – estate agents are not required to purchase their 'portal' advertising only from OnTheMarket – but is a variant on the exclusivity theme.... In short, we consider that the one other portal rule is to be characterised, in terms of its nature, as a semi-exclusive purchasing obligation: that is, an obligation to purchase advertising from a given portal, not to the exclusion of all other portals, but to the exclusion of all other portals but one, and that its economic and legal context strongly suggest that its nature and purpose are not to harm competition."

According to the CAT, the limited exclusivity provided by One Other Portal rule cannot be said to clearly and unambiguously have the object of restricting competition. To the contrary, the provision suggested a procompetitive object. The fact that the One Other Portal Rule is not exclusive, but permits members (if they wish) to use or continue to use one other portal, appears to increase competition between the two established portals.

In line with the existing EC decisions, the CAT also underlined the need for restrictive application of 'by object' restrictions and avoiding enlargement of the object box. It emphasised that the concept should be applied only to those categories of agreement whose harmful nature is easily identifiable in the light of experience and well-established economic analysis. As such, the CAT did not consider the One Other Portal rule as a restriction by object.

This was true even while considering it as a vertical restraint. The CAT noted that One Other Portal rule, if seen as a semi-exclusive purchasing commitment, not exceeding five years in duration, would not appear to fall within the categories of hardcore restriction excluded from the EU vertical agreements block exemption.

Insofar as the Brick and Mortar Rule was concerned, the CAT observed that the rule was intended to define the nature and scope of the business created by Agents' Mutual, rather than having the object of restricting competition. It also refused to consider such a restriction was anti-competitive by object, especially when the undertaking concerned had no market power.

Restriction by effect and the two-sided nature of the market

The CAT noted that a 'by effect' restriction requires an extensive analysis of an agreement in its market context. It discussed the 'two-sided' nature of the property portal markets (selling services to estate agents, and providing a property viewing service to the property seeking public) as well as the consequent network effects, that is, the more customers there are on one side, the more attractive the platform is to the other side. CAT noted that neither Agents' Mutual nor OnTheMarket was alleged to hold any significant degree of market power and, to the contrary, OnTheMarket was a new entrant to the property portals market, with all the market weakness that generally implies.

According to Gascoigne, the theory of harm was that the One Other Portal Rule, applied by a new entrant to the property portals market, leads to a weakening of the ability of Zoopla to constrain Rightmove's behaviour, particularly as regards its prices to estate agents. As a result of this, the estate agents were adversely impacted. However, the CAT observed that there wasn't enough evidence to prove this.

While examining the pro-competitive benefits, the CAT noted that the entry of a new player, 'OnTheMarket', suggested that the market was competitive and the mere fact that a new entrant onto a market has caused competitor difficulties is very much the point of competition. In case of markets with two-sided platforms, new entrants suffer from a much greater barrier to entry, making it much harder for them to foreclose competition. Therefore, a case of anti-competitive effects is highly unlikely. Moreover, the estate agents voluntarily agreed to join Agents' Mutual and accept its terms. It was only when the estate agents chose to join that that estate agent became subject to the One Other Portal Rule. Should an estate agent choose not to join, status quo was unaffected.

It is interesting to note that, while rejecting the anti-competitive effects of the restriction, the CAT went on to hold that "Given the difficulties facing a new entrant, it would not have been unreasonable for Agents' Mutual to require complete exclusivity" and the semi-exclusivity in the present case had pro-competitive effects.

The CA's decision

One Other Portal rule

Gascoigne challenged the above decision of the CAT before the CA. But the CA strongly agreed with the CAT decision. It agreed that the One Other Portal rule was a relevant restriction and that it was not anti-competitive by object or effect.

The CA also agreed with the finding that a new entrant suffers a much greater barrier to entry, especially in the case of two-sided markets, and that the absence of market power was directly relevant to whether the One Other Portal Rule was itself harmful to competition. It held the ‘semi-exclusivity’ as pro-competitive, holding that it could not have the object of restricting competition and that the CAT was right to rule that concept of restriction of competition ‘by object’ should be construed restrictively.

Given the rule's nature and the specific legal and economic context, including in particular Agents' Mutual's lack of market power, it was entirely legitimate for the CAT to consider that the rule did not reveal a sufficient degree of harm to competition, and that it was unnecessary to consider its effects.

Bricks and Mortar Rule

Agreeing with the CAT's finding on this, the CA concluded by noting that the Bricks and Mortar Rule could have become a threat to competition if OnTheMarket acquired market power but, as things stood, it was not. Thus, the CAT was right to consider that it did not reveal a sufficient degree of harm to competition for it to be deemed a restriction "by object".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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