Small and medium sized businesses (SMEs) might think competition law only affects large corporations, but that’s not the case. For SMEs, understanding competition law is crucial for maintaining a fair playing field and avoiding costly legal issues. Being informed about these laws can help prevent unexpected legal troubles and protect the business’s reputation.
So, what is competition law?
UK competition law aims to prevent behaviours that restrict market competition, including:
- Anti-competitive agreements; and
- Abuse of dominant market position.
The Competition Act 1998 (the Act), particularly Chapters I and II, outline these laws, which are enforced by the Competition and Markets Authority (CMA).
The CMA is the UK’s competition authority. Its role includes enforcing competition law and providing guidance on anti-competitive and abusive practices. The CMA has authority to investigate suspected violations of competition law and can accept binding commitments or voluntary redress from companies that have breach competition law.
UK competition law protects smaller businesses and consumers from unfair practices by larger market players. Ignoring these laws can lead to severe penalties.
Businesses that operate internationally must also be aware of local competition laws and relevant EU laws under Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).
What constitutes an anti-competitive agreement?
Anti-competitive agreements are any agreements or practices that prevent, restrict or distort competition. Many types of commercial agreements can be deemed as anti-competitive, including:
- Horizontal Agreements: Agreements between actual or potential competitors at the same level.
- Vertical agreements: Agreements between businesses at different supply chain levels.
An anti-competitive agreement may:
- Fix prices (whether directly or indirectly);
- Share markets or sources of supply;
- Impose unrelated obligations as contract conditions;
- Control or limit markets, investment, technical development or production; or
- Apply unfair conditions to transactions.
These can include subtle practices like ‘concerted practices’, which are not necessarily formal agreements, but have the intention or effect of preventing, restricting or distorting competition in the UK.
It’s not just large businesses that need to be cautious about anti-competitive agreements; SMEs must also be vigilant. SMEs should review agreements carefully, as even a seemingly standard contract may include clauses that would be considered anti-competitive, for example, a supplier imposing a price floor on a product. Training staff on what constitutes anti-competitive behaviour can also help avoid unintentional violations.
Can anti-competitive agreements be informal?
Yes, Chapter 1 of the Act captures oral agreements and informal collusions. Even unofficial conversations intended to share sensitive commercial information can be deemed anti-competitive, regardless of their formal documentation, intent or actual effect on competition.
What is a cartel?
Cartels are the most serious form of anti-competitive agreements and involve activities like price-fixing (directly or indirectly), production or supply limitation, market or customer sharing and bid rigging. Participation in a cartel can lead to severe penalties, including criminal charges under the Enterprise Act 2002, imprisonment and director disqualification.
Interacting with competitors is often part of running a business, but it is important to avoid discussing sensitive topics that could lead to anti-competitive behaviour. Conversations about current or future pricing, market strategies or bidding tactics should be approached with caution, as even seemingly casual discussions can be deemed as anti-competitive behaviour. Businesses must ensure all business decision are made independently and without any coordination with competitors.
What are the consequences of an anti-competitive clause in an agreement?
Many believe that the presence of an anti-competitive clause will only invalidate the specific clause in question. However, this is a misconception. In reality, such a clause can render the entire agreement unenforceable. This can trigger a chain of issues, such as legal disputes, consumer and competitor claims, extensive litigation and significant damage to the business’s reputation.
Are there any permitted anti-competitive agreements?
Certain anti-competitive practices may be allowed if their benefits outweigh the negative impact on competition. However, there are no exemptions for cartels and prohibited cartel activities.
Unfortunately, businesses aren’t able to pre-emptively confirm the legality of their activities with the CMA, so legal counsel is essential. Exemptions may apply in scenarios where the agreement:
- Promotes economic or technical progress; or
- Contributes to improving the distribution or production of goods.
However, these factors alone do not guarantee exemption and businesses must ensure that other considerations are met. For example, in the above scenarios, the agreement must provide consumers with a fair share of the benefits.
What is considered an abuse of a dominant market position?
The abuse of a dominant market position is prohibited under Chapter II of the Act. It is crucial to distinguish between simply having market power and abusing it. Businesses that misuse their dominant position can face fines of up to 10% of its groups global turnover, as well as injunctions and litigation. Businesses with over a 40% market share must be particularly cautious.
Examples of abusive practices:
- Tying in purchases of goods or services, for example, a party can buy product A but only on the condition they buy product B too.
- The imposition of unfair trading terms in agreements, for example an exclusive purchase requirement.
When assessing potential abuse, the CMA will evaluate the dominant business’s requirements and any surrounding circumstances. For instance, refusing to trade with a company may not be considered abusive if the company has poor credit.
SMEs need to be mindful of practices that could unfairly disadvantage competitors or consumers, especially if they hold a decent market share. Abuse of a dominant market position isn’t limited to large-scale companies; even businesses in niche or smaller markets can be scrutinised. For instance, a small business in a local town might be found to be abusing its position if it starts charging excessively high prices or imposes unfair conditions, such as requiring customers to buy unnecessary additional supplies when using the business’s services.
Adhering to competition law is essential for businesses of all sizes, including SMEs. Engaging in anti-competitive practices or abusing market power can have serious consequences, impacting financial stability and reputation. To mitigate these risks, it is essential for businesses to make independent decision and ensure that agreements adhere to competition law. Regular reviews of practices and agreements, along with seeking expert legal advice when necessary, are key to maintaining compliance and protecting the business.
