Memorandum submitted by the Office of
Fair Trading (Pigs 28)
I am writing with regard to the EFRA Select
Committee inquiry into the UK pig industry. I understand from
the transcript of your meeting on 13 October 2008, and from subsequent
communications with the Committee Clerk that the Members of the
Select Committee have queries regarding what form of discussions
on the supply chain can be held by producers, processors and retailers
in compliance with competition law[11]
and to know what guidance or advice is available.
CONTEXT
By way of background and to set the Office of
Fair Trading's mission in context, the Government White Paper
Enterprise: unlocking the nation's talent re-affirmed that
enterprise is "one of the five core drivers of the Government's
strategy to lift the productivity of the economy". That enterprise
culture rests on a framework of UK and European competition law.
One of the key responsibilities of the OFT is to promote compliance
with these laws.
Competition is at the heart of any successful
market economy. It provides a stimulus for businesses to improve
their performance and to reduce their prices in order to gain
an advantage over rivals and win more business. It encourages
the development of new or improved products or processes and increases
economic growth and living standards. Without competition in food
production, for example, there could be less incentive for farmers
to offer better produce to their customers and, ultimately, to
consumers.
As set out in more detail below, the UK and
European competition laws prohibit anti-competitive agreements
and the abuse of dominant market positions. Such anti-competitive
agreements and the abuse of dominant market positions increase
prices or reduce quality, among other things, and harm consumer
choice. Such behaviour also makes a supply chain less efficient,
undermining productivity and the performance of the economy as
a whole.
There is nothing, in itself, wrong with bilateral
discussions between different parts of a supply chain. They may
serve a useful and necessary function, benefiting consumers by
encouraging greater efficiency.
However, as the Select Committee is already
aware, participants in discussions between members of an industry
need to be aware of the risk of dampening normal competitive processes,
and breaching competition law. For example, the exchange of information
on commercially sensitive competitive matters, particularly proposed
future price information, can remove or reduce the uncertainties
inherent in the competitive process to the detriment of consumers.
So, by way of further example, if the object of discussions is
to restrict the range or volume of products on the market or to
artificially raise their prices then such discussions would be
illegal under competition law.
THE LEGAL
FRAMEWORK
The legal framework governing agreements and
information sharing between parties is contained in the UK Competition
Act 1998 ("CA98") and Article 81 of the Treaty establishing
the European Community. This legislation explicitly prohibits:
"agreements between undertakings, decisions
by associations of undertakings or concerted practices which...
have as their object or effect the prevention, restriction or
distortion of competition ..."
The term "agreement" (taken to include
decisions by associations of undertakings and concerted practices
for the purposes of this letter) has a wide meaning. It covers
agreements whether legally enforceable or not, written or oral.
There does not have to be a physical meeting of the parties for
an "agreement" to be reached: an exchange of letters
or telephone calls may suffice.
In practice, any form of direct or indirect
contact between competitors in which information about the future
commercial conduct of one business is disclosed to another—for
example by revealing pricing plans—will amount to an agreement.
The same would apply to any attempt to influence the commercial
conduct of a competitor.
There is an exemption for agreements which:
(1) contribute to improving production or distribution, or promoting
technical or economic progress, whilst (2) allowing consumers
a fair share of the benefits and provided (3) any restrictions
on competition are indispensable to these objectives and (4) the
agreements do not substantially eliminate competition. All four
conditions must be met for the exemption to apply and the burden
of proving that the conditions are met lies on the businesses
concerned. In practice, serious restrictions of competition are
unlikely to meet all the conditions for exemption.
It is also important to emphasise that, although
the exemption conditions are capable of being applied in the context
of a "crisis" situation (for example, production cutbacks
to deal with chronic overcapacity) as well as normal trading conditions,
the exemption conditions are firmly grounded in objective criteria.
If the conditions are not met, an agreement or practice will not
benefit from exemption, no matter how well-intentioned the motives
for it may be.
ASSESSING COMPLIANCE
As a result of changes made to EC and UK competition
law in 2004, businesses no longer need to notify agreements to
the competition authorities in order to obtain exemption. Instead,
businesses are required to assess for themselves whether their
agreements may restrict competition but nevertheless benefit from
exemption. This is explained in more detail in the guidance issued
by the OFT on modernisation (see below).
In light of this, the OFT does not generally
provide specific guidance to individual sectors of the economy
or offer legal assurance to sector representatives as the law
applies uniformly across all sectors of the economy. There may
be rare exceptions where truly novel or unresolved legal questions
are raised about the application of UK or EU competition law,
in which cases the OFT may publish an Opinion to aid business
compliance on such issues. However, we need to look at any such
request on its merits, in the light of the specific facts and
the resource implications for OFT. Moreover, the OFT would not
give specific guidance on issues that are not truly novel or unresolved
and/or are currently under investigation in the same or other
sectors.
One important factor underpinning our approach
is that UK and EU competition law is based, in part, on the effects
of firms' behaviour, as well as its form. Except in the most clear-cut
cases, one needs to examine the actual or potential effects of
an agreement in the relevant, specific economic and factual context
in order to determine whether it prevents, restricts or distorts
competition and, if so, to go on to consider whether it benefits
from exemption. This effects-based approach avoids the risk that
a rule might prohibit behaviour which is, in fact, beneficial
to consumers, or conversely might allow harmful behaviour. It
also explains why general guidance provided by the OFT does not,
and largely cannot, include definitive lists of practices that
are, and are not, permissible under competition law. It also means
that providing guidance, or publishing an Opinion, can be very
resource intensive for OFT. We need to weigh these resource implications
carefully against possible alternative priorities, such as taking
on enforcement cases.
GUIDANCE
The OFT has issued already a host of materials
which can assist businesses within the pig industry to assess
what nature of discussions can be held by producers, processors
and retailers in compliance with competition law.
In particular, the OFT has published extensive
guidance to help businesses and industry representatives assess
their actions for compliance with all aspects of UK and EU competition
law. Detailed guidance is available on the OFT website at:
http://www.oft.gov.uk/advice_and_resources/publications/guidance/competition-act/
The OFT has produced specific guidance for trade
bodies which sets out some examples of activities that may or
may not be permitted and includes details on information sharing.
The guidance notes, for example, that the exchange of information
on output and sales should not affect competition provided that
it is sufficiently historic and aggregated and cannot influence
future competitive market behaviour.
http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft408.pdf
You may also find useful the guidance recently
published by BERR. The guidance explains how competition law applies
to voluntary agreements between businesses in the UK:
BERR guidance: Competition Law: issues which
arise when Government or Lobby Groups seek to encourage business
to work together to deliver desired policy outcomes.
http://www.berr.gov.uk/files/file45711.pdf
See also the additional guidance of relevance
in the Annex.
CONCLUSION
This letter has provided a high-level overview
of the key areas of the legal framework that apply to discussions
between industry participants, and pointed out the range of relevant
guidance that the OFT and BERR have already produced. We appreciate
that certain industries may at different points in time desire
more specific reassurance from the OFT as to which practices may
and may not permissible, I hope we have clarified the significant
constraints on the OFT in responding to these requests.
Sonya Branch
Senior Director, Markets and Projects—Goods
The Office of Fair Trading
Annex
FURTHER RELEVANT OFT GUIDANCE
Competing Fairly: http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_mini_guides/oft447.pdf
Agreements and Concerted Practices: http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft401.pdf
Vertical Agreements: http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft419.pdf
Modernisation: http://www.oft.gov.uk/shared_oft/business_leaflets/competition_law/oft442.pdf
This UK guidance is in addition to the large
volume of judgments of the European Courts and decisions/guidance
issued by the European Commission.
http://ec.europa.eu/comm/competition/index_en.html
11 Predominantly, Chapter I and Chapter II of the Competition
Act 1998 and Articles 81 and 82 of the Treaty establishing the
European Community. Back
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