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Delegated Legislation Committee Debates

Draft Competition Act 1998 (Land Vertical Agreements) Order 2000

Fourth Standing Committee on Delegated Legislation

Thursday 3 February 2000

[Mr. Jim Cunningham in the Chair]

Draft Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000

Draft Competition Act 1998 (Determination of Turnover for Penalties) Order 2000

4.30 pm

The Minister for Competition and Consumer Affairs (Dr. Kim Howells): I beg to move,

    That the Committee has considered the draft Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000.

The Chairman: With this it will be convenient to consider the draft Competition Act 1998 (Determination of Turnover for Penalties) Order 2000.

Dr. Howells: We meet to consider two significant orders that need to be put in place before the prohibitions in the Competition Act 1998 come into force on 1 March 2000. They illustrate well the approach that the Government have taken in steering that important legislation to this stage, a process in which my hon. Friend the Member for Edinburgh, South (Mr. Griffiths) played a notable part during the Bill's passage.

In contrast to the form-based regime that we inherited, we do not wish to burden business or the Office of Fair Trading and the regulators with the unnecessary tasks of notifying and scrutinising many agreements that are innocuous or beneficial overall. Apart from the waste involved, that gets in the way of the major task of competition authorities, which is to uncover cartels and other anti-competitive practices, and punish the participants. The purpose of the land and vertical agreements exclusion order is to remove any need to notify such agreements to the OFT or regulators on a precautionary basis, while putting in place mechanisms to deal with any agreements within the categories that raise competition concerns.

Although we do not wish to burden innocent business parties, we are determined that powers should be available to punish those who engage in anti-competitive practices. That will deter others from doing so. Our approach is exemplified by the turnover for penalties order, which fills out the detail for the maximum penalty that may be imposed for infringing one of the 1998 Act's prohibitions. It is right that the maximum penalty should be proportionate and that the actual penalty should be tailored to individual circumstances. The penalties regime will achieve that, but I would not wish to hide—indeed, the Government take credit for it—that the regime will, in some cases, provide for big financial penalties for those who engage over a protracted period in the worst forms of anti-competitive behaviour, such as cartels.

It should come as no surprise that we have laid the exclusion order. During the passage of the Bill, there was widespread agreement on both sides of the House and in another place that it would make sense to exclude land and vertical agreements from the chapter I prohibition. Indeed, section 50 was added to give express power to do that through secondary legislation. The order will disapply the prohibition from and agreements that create, alter, transfer or terminate an interest in land—for example, a lease—together with certain obligations or restrictions that are part of the agreement and are accepted in the party's capacity as holder of an interest in land, or benefit him in that capacity. Examples of those are the usual covenants in commercial property agreements that relate to payment of rent, service charges, obligations to insure property and clauses on the use to which the property is to be put.

The language of part of the order is necessarily legalistic, drawing as it does on land law. It may be helpful to hon. Members if I give an example of the kinds of agreements that we wish to exclude from the prohibition. Shopping centre leases will commonly impose a number of restrictions on the occupiers. Shopping centre owners will wish to secure certain key retailers and to offer a mix of retail outlets. so the restrictions will cover goods or services that may be sold from the premises or from other premises in which the parties have an interest. Similar restrictions to those in leases concerning the use of premises are to be found in licences such as for designer goods franchises in a department store. As a result of consultation, the exclusion now covers those licences as well as leases.

Such restrictions might be thought to affect competition. They certainly affect the landlord's and tenant's freedom. However, they are unlikely to have an appreciable effect on competition since that depends on the market as a whole and not individual outlets, and the shopper should have alternative outlets to patronise.

Much of land law is founded on establishing a firm legal base for the employment of property, and property lawyers are cautious creatures.

Hitherto, they have not had to consider the application of competition law to most leases, since neither the Fair Trading Act 1973, nor the Restrictive Trade Practices Act 1976 have been applied to land, and although that is not true of European Commission competition provisions in articles 81 and 82 of the treaty, their application is subject to the requirement that inter-state trade is affected. It is unlikely that a lease in Brent Cross shopping centre, for example, affects inter-state trade.

There is no requirement for such an effect under the chapter I prohibition, so businesses may feel that there is a risk of their agreements being caught and may well notify them to the Office of Fair Trading on a precautionary basis. That is the message from the property industry and their legal advisers; it is supported by experience in Ireland, where a domestic prohibition modelled on article 81 was introduced and the Irish Competition Authority was flooded with notifications. It would make no sense to expose our own Office of Fair Trading to such an unnecessary task when it has been armed with new powers to tackle serious competition matters. As I shall explain shortly, there are better ways to tackle land agreements which raise competition issues.

In drawing up the definition of the land agreements that are to be excluded by the order, the department has been greatly assisted by the expertise of a number of consultees, notably the British Property Federation, the British Retail Consortium and the Royal Institution of Chartered Surveyors.

There is also a good case to exclude vertical agreements, as was recognised during the passage of the Competition Bill. Broadly, those are agreements between a supplier and a business customer or dealer concerning the use or marketing of the goods or services supplied. Such agreements are less likely to raise anxieties about competition than horizontal agreements: between businesses at the same level of trade, such as two manufacturers of a product. Indeed, the prevailing view among economists is that vertical agreements will have only beneficial effects, such as stimulating inter-brand competition, except in some cases where one or more of the parties has market power or sometimes when there is a network of similar agreements. Even in such cases, careful examination of the market and the other circumstances is needed to establish whether the vertical agreements are malign.

The fact that vertical agreements can be found by the competition authorities to distort competition, coupled with the rather narrow block exemptions that the Commission has made, has led businesses to seek comfort from the Commission about the position of their own agreements. It would not be a good start to the new regime if the OFT and the regulators were flooded with innocuous agreements. It took years for the Commission to recover from the 30,000 agreements that were notified to it in the six months after what is now article 81 of the treaty came into force in 1962, if it ever has recovered.

The Commission has recognised that there is no need to examine individually the vast majority of vertical agreements.

Certain categories of agreement—those on exclusive distribution, exclusive purchasing and franchising—have been block exempted. The block exemptions were widely criticised for imposing a straitjacket—agreements deviating even marginally from their terms fell outside them. They did not succeed in stemming the flow of precautionary notifications. The Commission has, therefore, issued a new block exemption regulation, which covers vertical agreements as a class, to replace the three existing block exemptions on the point of expiry. The regulation was made on 22 December and it begins to apply on 1 June.

Our definition of ``vertical agreement'' is closely modelled on the Commission's definition. As far as possible, questions relating to competition are to be interpreted, under the Competition Act, consistently with the treatment of corresponding questions in Community law. A court is to have regard to relevant Commission decisions or statements. Except where we have deliberately chosen to draw a distinction, the meaning of ``vertical agreement'' under the order will be the same as the Community definition. Businesses and their advisers will be able to rely on the Commission's guidelines on vertical agreements to interpret the order. The OFT is also consulting on its draft guidelines on the exclusion of vertical and land agreements.

The effect of the new Commission block exemption on our domestic chapter I prohibition, when it comes into force, will be to provide an automatic parallel exemption. Section 10 of the Competition Act provides that agreements exempt under article 81(3), or that would be exempt if they affected trade between member states, would be exempt from the chapter I prohibition.

It might reasonably be asked why we are proceeding with the exclusion order as it applies to vertical agreements. First, we have assured businesses for many months that there will be an exclusion for vertical agreements when the chapter I prohibition comes into force on 1 March, and that they need not avail themselves of the Act's transitional arrangements to notify the OFT of agreements before 1 March, or to notify it under the Act's main notification provisions by that date. The need for such notifications has been forestalled. The Commission's block exemption will not apply until 1 June, after the expiry of the three existing block exemptions.

Secondly, it is right to go beyond the Commission in excluding vertical agreements. We have not adopted all the qualifications that the Commission has in its block exemption, such as market share tests. The approach was supported when we consulted on a draft order. We can be more relaxed than the Commission because its concern that vertical agreements do not divide the single market on national grounds is not relevant to the chapter I prohibition. In almost every case in which the Commission has acted against vertical agreements, single market considerations have been the predominant, or the only, concerns.

Our safeguards are more effective than those available to the Commission to deal with vertical agreements that cause competition concerns domestically. The safeguards are absolutely necessary if land and vertical agreements are to be excluded.

One key safeguard is that both we—under article 4 of the order—and the Commission propose not to exclude or to exempt price-fixing vertical agreements. Of course, vertical agreements might facilitate price fixing such as resale price maintenance, which has led some to consider them suspiciously. We and the Commission have adopted wide definitions to ensure that not only the most overt forms of price fixing, but also the more subtle forms of pressure or incentives, will cause an agreement to fall outside the agreement and within the prohibition.

It should be remembered that there is no exclusion from the chapter II prohibition of abuse of dominant position for parties to vertical and land agreements. I said that property companies had hitherto not needed to have much regard to competition law. Those with a dominant position in a property market will need to ensure that their behaviour does not constitute an abuse, even if there is no effect on inter-state trade.

We have also ensured that the Director General of Fair Trading, or the sector regulators, will be able to claw back from the exclusion an agreement that raises competition concerns, and to subject it to the chapter I prohibition. Under the Act, directors will be able to deal with vertical and land agreements in a focused way. For example, they will be able to investigate those about whom there has been a complaint, rather than having to consider every vertical agreement. Provision for clawback is provided by article 7, which provides the power by analogy to an existing clawback in paragraph 4 of schedule 1 of the Act. The grounds for clawback require either a party to the agreement to have failed—without reasonable excuse—to give the director the information that he was empowered to require of them, or the director to have considered that the agreement would infringe the chapter I prohibition, were it not for the exclusion, and that he would not likely grant the party an unconditional individual exemption. The clawback power is more effective and useful than the Commission's power to withdraw the block exemption from a vertical agreement.

The final safeguard that we have retained is the complex monopoly provisions of the Fair Trading Act to deal with cases in which there are common practices in a market, of no concern individually, that cause problems when adopted widely in an industry. There might be a network of vertical agreements, which have an effect on competition. The complex monopoly provisions would allow for investigation and remedies. At the European level, the Commission has no equivalent of the remedial powers.

With the powerful safeguards in place, excluding land and vertical agreements will enable the new competition regime to be more effective and efficient in dealing with matters of real competition concern—including relevant vertical and land agreements—than if the OFT and the regulators became bogged down in detailed scrutiny of what would usually prove to be benign agreements. For the regime to be fully effective, it must be able to deter those who see the profit to be made from long-running infringements of a prohibition.

I should turn to the turnover for penalties order. Section 36 of the Act enables the Director General of Fair Trading to require someone to undertake to pay him a penalty for an infringement of the Act's prohibitions. Subsection (8) provides that no penalty fixed by him may exceed 10 per cent. of the undertaking's turnover, as determined in accordance with such provisions as may be specified by the Secretary of State. The order specifies the way in which the turnover is to be determined.

Financial penalties are an essential new element in the regime introduced by the Act, and are intended to deter anti-competitive behaviour. Under the present law, the worst that can happen is that the business engaged in price fixing is asked to stop, as happened in the recent Volvo case. That amounts to a verbal slap across the wrists.

In the modern world, it is not unusual for business to face stiff fines for breaking competition laws. They have become commonplace in the United States, where Hoffman-LaRoche was fined $500 million recently. The Commission has also imposed heavy fines, including one of 102 million ecu on Volkswagen. The company had phoned dealers in Italy to tell them not to sell cars to Germans or Austrians, because the cars were cheaper in Italy than they were in those two countries. Many cars must be sold to make up a £69 million fine; I cannot envisage the company doing that again in a hurry. However, we were not able to touch Volvo when it was up to the same.

I should emphasise that the penalty will be determined according to the circumstances and in the light of the guidance of the Director General of Fair Trading on the appropriate sum. The guidance sets out the factors that will be used in calculating the penalty. They include the undertaking's turnover in a relevant product and geographic market, the gravity and duration of the infringement and the size of any gain made. The figure is then adjusted for any aggravating factors, such as the involvement of directors and senior managers and repeated infringement, and any mitigating factors, such as duress, genuine uncertainty about whether an agreement constituted an infringement and negligent, as opposed to intentional, infringement. Any penalty can then be adjusted to take into account the 10 per cent. ceiling. The order is concerned with determining the ceiling.

Under the corresponding European Community regime the maximum fine is 10 per cent. of the undertaking's worldwide—not EC—turnover in the preceding business year. We have departed from that approach in two significant respects, just as, elsewhere in the Act, we made changes when we thought that the EC regime could be improved. We decided that as the measure is a domestic one, concerning trade in the United Kingdom, the turnover taken into account should be confined to what arises in the United Kingdom. Subject to a minimum of one year's and a maximum of three years' turnover, the relevant turnover will be that arising for the entire period of the infringement. I know that that has caused some rumblings in business quarters, because of the size of the penalties that could be imposed, but I make no apologies.

We know from the cartels that the OFT has uncovered under its existing powers that they can be long-lived, often enduring for years. The United States Department of Justice has based its sentencing guidelines on research showing that cartels can lose the economy 20 per cent. of the volume of the commerce affected over their life. That is made up of a 10 per cent. increase in prices and a 10 per cent. dead-weight cost. Prices can be raised much higher. In the vitamins cartel uncovered in the United States, prices were raised between 20 per cent. and 50 per cent., to the great detriment of consumers. It is obvious that the profits could be significantly higher than any penalty, should the cartel manage to evade detection for several years. The punishment should fit the crime and those who have taken part in a long-running cartel should face a higher penalty than a business that has committed a one-off infringement. That will help to deter those eyeing the profits to be made before the cartel is detected.

The orders will complete the establishment of a modern competition system that will be effective and efficient in dealing with matters of significant competition concern, and able to punish transgressors and deter those minded to follow in their path.

4.53 pm


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