Competition Law Compliance Checklist
SPEEDREAD: A brief overview of the main principles of competition law and what is prohibited, followed by a quick checklist of actions that businesses can take to ensure compliance with competition law. It may also assist businesses to identify illegal anti-competitive behaviour by others.
Competition law is designed to ensure that companies compete fairly with each other. Non-compliance with competition law can have serious consequences for both businesses and the individuals who run them (including directors).
Here we give a brief overview of the main principles of competition law and what is prohibited, and provide a quick checklist of actions that businesses can take to ensure they comply with competition law. It may also assist to identify illegal anti-competitive behaviour by other businesses. Also see our article on Agency Agreements for more details about how they are affected by UK and EU competition law.
Chapters I and II of the Competition Act 1998, and Articles 101 and 102 of the Treaty on the Functioning of the European Union set out the main principles of competition law which affect trade within the UK and EU. There are 3 main types of anti-competitive behaviour, namely: cartels; other forms of co-operation; and abuse of a dominant position.
Breaching competition law
- Failure to comply can have serious implications for a business, including large fines.
- Certain serious breaches of competition law may also expose an individual to the risk of criminal prosecution, which includes fines, prison sentences and disqualification of directors.
- Businesses can be exposed to claims that may exceed any fines imposed on them.
- Restrictions in agreements that breach competition law may be unenforceable.
All forms of cartel activity are strictly prohibited. A “cartel” describes any organisation or arrangement between at least two competitors that is designed to reduce competition between them and so increase prices or profitability beyond the level that could be achieved competitively. An agreement does not need to be in writing and can be in any form including purely oral. The main examples of cartel activity are:
Price fixing: Any understanding or agreement about price levels or increases can constitute price fixing. Even a statement to a competitor like “we intend to increase prices next year”, can constitute unlawful price fixing. Unlawful price fixing includes: setting minimum or target prices for particular customers or sales in general; co-ordination of the timing of price increases; agreeing any aspects of trading conditions such as discounts, margins, rebates, credit terms, advance payments, minimum prices and list prices.
Bid rigging: This is when businesses agree the outcome of a tender or pitch process amongst themselves, either by: deciding in advance which company will bid; who will bid the best price; or what the tender process should be. Bid-rigging eliminates fair competition from a tender or pitch process and so removes the customer’s free choice. It will almost certainly lead to the customer paying higher prices.
Market sharing: This may involve an agreement to allocate particular customers or sales territories to individual cartel members, or not to go after another’s customers. It can result in less choice and higher prices for customers.
Information exchange: A business must not agree to share confidential or commercially sensitive information with competitors, for example: prices; margins; customers; or sales information. This could lead to co-ordinated commercial behaviour and is therefore illegal. Other forms of information exchange may be permissible. For example, if the information provided is historical (and has no value in predicting future commercial behaviour), anonymised, aggregated, independently compiled and public.
Limiting output or sales: Sales or production quotas are often used to control the market position of cartel participants and maintain artificially high prices.
If you become aware that the business is involved in any cartel activity or you are approached by a competitor to participate, take legal advice immediately.
Other forms of co-operation
Several other forms of co-operation with competitors may breach competition law. To be safe, always take legal advice before doing any of the following:
- Joint purchasing agreements.
- Research and development agreements.
- Specialisation agreements (where competitors agree to specialise in the production of certain types of goods).
- Standardisation agreements (for example, where companies agree basic technical standards for products).
- Joint advertising.
- Joint sales.
Each of these can be prohibited if the objective or effect is to reduce competition. However, they may be permissible if, for example, there are customer benefits that outweigh any anti-competitive effect.
Abuse of a dominant position
What is a “dominant position”? It is a question of several things, including the extent of a business’s market power over a period of time and the size of the business. Market share alone is not the determining factor although a business with less than 40% market share is unlikely to be regarded as being in a dominant position. It is likely to be considered to be in a dominant position, however, if the business can operate free of the normal trading restraints to which its lesser competitors are subject.
If a business is considered to be in a dominant position it will be regarded as abusing that position if it engages in conduct which exploits its customers or unfairly excludes competition.
How to achieve compliance with competition law
It is crucial that a compliance culture is introduced into the business, meaning that the business, from top level down, needs to show a commitment to complying with competition law. The following 4 steps are recommended for businesses to follow:
- Identification: Carefully analyse the company’s business to identify areas where the company might risk being in breach of competition law (such as: contact with competitors, collaborations, large market share).
- Risk Assessment: Next, assess the seriousness of each of the risks identified, e.g. categorising which of your employees are working in a high risk area of the business (such as, marketing and sales managers, contract control managers and other staff likely to have contact with competitors).
- Risk Mitigation: Set up policies, procedures and training to reduce the chances of identified risk occurring. This could involve establishing an employee competition code of conduct accompanied by staff training on the application of the code. The code, for example, could identify or warn against some examples of cartel behaviour which should be avoided when employees meet competitors (e.g. at trade fairs or conferences).
- Review: Regularly review the steps above and the company’s commitment to compliance to ensure the company maintains its compliance behaviour. The frequency of review will depend on the size and type of business, and number of staff whose roles are likely to be affected by competition law.
The Competition and Markets Authority (CMA) investigates and enforces competition law in the UK. It does not expect directors responsible for closure of contracts to have a detailed knowledge of competition law but it does expect them to be able to identify potential risks of breaching competition law so as to know when to take appropriate protective measures. These may include getting the company’s solicitors to check important contracts before they are signed to see if their terms are in compliance with competition law, or using the solicitors to assist in the compliance review.
There is a CMA Cartel Hotline for reporting suspected cartel infringements or you can contact the relevant industry regulator to report other suspected anti-competitive behaviour.
Published: 22 March 2016