In the second of a two part article, we continue the analysis of the Competition Act 1998. This part examines the following key issues:
Investigation. The Director General has wide powers to investigate infringements of either the Chapter I or Chapter II prohibition, namely, ordering production of documents or carrying out a dawn raid either with or without a warrant. An individual or an undertaking runs the risk of committing a criminal offence for non-co-operation with an Office of Fair Trading (OFT) investigation, punishable by fines or up to two years imprisonment.
Enforcement. The director General will have significant powers to punish breaches of the 1998 Act, including the ability to impose interim measures, to impose fines of up to 10% of turnover, or to direct the parties concerned to modify or terminate the agreement or to refrain entering into similar agreements in future or to modify or cease the abusive conduct.
Notification An agreement may be notified to the Director General for guidance or a decision as to whether or not the agreement is likely to infringe the Chapter I prohibition and, if so, whether he would be likely to grant an individual exemption if asked to do so (in the case of guidance), or to grant an individual exemption (in the case of notification for a decision).
The vast majority of applications will be dealt with by administrative letter; the equivalent to the comfort letters issued by the European Commission.
Third party action. For a company that wishes to complain about a competitor's or another third party's anti-competitive behaviour, there are two main option; complaining to the OFT or bringing a court action. A complaint to the OFT is likely to provide a relatively cost effective route to redress, however, the Director General has no ability to award damages for breach of prohibition, unlike the courts.
Appeals. Parties (and any affected third parties) will have an automatic right of appeal on specific grounds against decisions of the Director General to an appeal tribunal of the Competition Commission. The Competition Commission is a new body created by the 1998 Act which will take over the existing functions of the Monopolies and Mergers Commission.
Relationship with EC law. Part of the rationale for the 1998 Act was to ensure, so far as possible, that UK competition law mirrored EC competition law. The article discusses three areas which are of particular importance in understanding the relationship between the two:
The so-called double barrier of domestic law and EC law.
The governing principles clause (section 60)
In the first part of this article (FirstSource, PLC, 1998, IX(11), 23) as well as where the undertaking could not have been unaware that its agreement or conduct had as its object the restriction of competition, even if it did not know that it would infringe either prohibition contained in the 1998 Act. The draft also states that ignorance of the law is no bar to a finding of intentional infringement, and that the Director General may consider internal documents in establishing whether there is intention. Moreover, deliberate concealment of an agreement or practice is likely to be regarded as strong evidence of an intentional infringement. The Director General is likely to find that an infringement of the Chapter I or Chapter II prohibition has been committed negligently where an undertaking knew or ought to have known that its actions would result in infringement of the prohibition.
The agreement has been notified to the Director General or the European Commission. If a party to an agreement which may infringe the Chapter I prohibition has notified the agreement to the EC Commission for an exemption under Article 85(3), the Director General may not impose a fine for infringement of the Chapter I prohibition which occurs after the date of notification but before the date on which the Commission either takes a decision or issues a comfort letter (unless the provisional validity at the EC level is withdrawn by the Commission). No such immunity exists under the Chapter II prohibition (section 41). Where an agreement that is subject to the Chapter I prohibition has been notified to the Director General, he may not impose a fine in respect of the period from the date of notification until the determination of the application. No immunity exists for notifications under the Chapter II prohibition (sections 13 and 14).
The infringing agreement is a "small agreement" (section 39). This immunity applies in relation to both the Chapter I prohibition and the Chapter II prohibition (with the exception of price fixing agreements) to businesses which have a turnover of less than a specified amount and/or a relevant market share of less than the prescribed level. The criteria relating to turnover and market share will be set out in secondary legislation, drafts of which have not yet been published. However, in cases involving serious anti-competitive effects, the Director General can withdraw the immunity from fines in relation to both the Chapter I and Chapter II prohibitions. Furthermore, companies which benefit from this immunity are not exempted from enforcement action by the Director General to halt infringements of the Chapter I or Chapter II prohibition, nor from third party actions for damages in the courts.
There is no statutory requirement to notify agreements; the parties themselves must consider whether a particular agreement might infringe the Chapter I prohibition, taking into account the guidance given by the OFT in relation to appreciability, as well as whether it should more appropriately be notified to the European Commission.
Notification of an agreement may be made to the Director General for guidance or a decision as to whether or not the agreement is likely to infringe the Chapter I prohibition (this is called negative clearance) and, if so, whether he would be likely to grant an individual exemption if asked to do so (in the case of guidance), or to grant an individual exemption (in the case of notification for a decision).
The Director General has issued for consultation a draft "Form N", which is described as a checklist of information which must be supplied to the Director General when notifying an agreement, but which in practice is likely to be regarded in the same way as Form A/B, the form on which agreements must be notified to the Commission. Form N should also be used when notifying conduct for negative clearance in the form of guidance or a decision. Fees may be charged for notifications to the Director General, but the level of fees has yet to be determined (section 53).
The guidance procedure is similar to the confidential guidance procedure in relation to merger cases as it is given on the basis that the views of third parties are not taken into account. Although guidance is not legally binding, the Director General is not able to reopen a case unless there is a material change of circumstances since the guidance was given or incomplete or false information had been given or a complaint is received from a third party.
As mentioned above (see "Enforcement"), parties are immune from fines from the date of notification of an agreement for a decision or guidance.
It is also possible to seek guidance on whether particular conduct would amount to the abuse of a dominant position under the Chapter II prohibition. Although no exemption is available for abusive conduct (similar to the position under Article 86), the availability of guidance in relation to the Chapter II prohibition may be helpful in practice, particularly where a pricing strategy or discounting scheme is planned by a firm that may enjoy a dominant position and comfort is sought before substantial time and resources are committed to launching such a promotional scheme.
The OFT has indicated that the vast majority of applications will be dealt with by administrative letter; the equivalent to the comfort letters issued by the European Commission, which provide an informal indication of the Commission's position, usually to the effect that it has decided to close its file on the matter. Such letters are not provided for in the 1998 Act and may only contain limited reasoning about the basis for closure of the file. Nevertheless, it is expected that the Director General will not normally re-open a case unless a material change in circumstances since the letter was written comes to his attention or it appears that the notification may have been incomplete or misleading.
For a company that wishes to complain about a competitor's or another third party's anti-competitive behaviour, there are two main options:
Complaining to the OFT.
Bringing a court action.
Complaining to the OFT. Complaints by interested third parties, in particular competitors and customers of the parties to an infringing agreement or a dominant undertaking may be made to the Director General or the appropriate sector regulator and are likely to form a key part of the OFT's intelligence in seeking to enforce the new prohibitions.
There is no statutory form to be used in making a compliant. Generally, however details of the complainant will be required (for example, whether it is a customer or competitor), details of the complaint (and copies of relevant correspondence or meeting notes), and relevant market information. Anonymous complaints will not normally be permitted, and if a complainant does not wish its identity to be revealed, this should be made clear at the earliest opportunity (OFT consultation draft on the Major Provisions of the Act).
Complaints should identify confidential information as such and include it in a separate annex (Rule 25 of the Director General's draft Procedures Rules). The Act imposes limits on the disclosure of information obtained by the Director General. However, disclosure can be made if consent has been obtained or if it is necessary for the purpose of facilitating any of the Director General's functions in relation to the Chapter I or Chapter II prohibitions (section 55). In the context of a complaint, if the Director General proposes to disclose any of the information contained in the confidential annex, he must first consult the person who provided the information if it is practicable to do so (Draft procedural rules).
OFT officials have indicated informally that the OFT anticipates that around 1200 complaints will be made annually under Chapters I and II, with around a quarter of these proving to be sufficiently serious to lead to an investigation. The estimates are based on a survey of law firms and the OFT's experience in dealing with complaints under the existing legislation. A complainant will have a right of appeal to the Competition Commission against a decision of the Director General (see "Appeals" below).
The Director General has indicated that he intends to operate a similar policy on "whistleblowers" to that introduced by the European Commission (OFT formal consultation draft on Enforcement). Accordingly, an undertaking which provides information and co-operates with an investigation by the Director General into a cartel may be granted a reduction in the level of the fine which would have been imposed on it in the absence of co-operation.
Third party court actions. The 1998 Act does not contain an express right for third parties (such as competitors and customers) to seek damages and/or other remedies in the courts for infringement of the Chapter I and Chapter II prohibitions. Such actions will be dealt with in the same way under English law as actions based on Articles 85 and 86 of the EC Treaty (in other words, probably as an action for breach of statutory duty, although there is academic debate on this). The courts have considered the direct effect of Articles 85 and 86 in a number of cases but have not yet awarded damages for their breach, although a number of out of court settlements have been reached with injured third parties receiving compensation. Where a case is brought involving infringement of the Chapter I or Chapter II prohibition, the courts are likely to be guided by the following principles that have been developed in cases involving Articles 85 and 86:
The courts do not lightly reach findings of infringement; compelling factual and expert economic evidence is required, although the absence of having to prove an effect on trade between member states may well remove an impediment which in some cases has been significant.
The courts have refused to let parties to contracts invoke the direct effect of Article 85 in order to mend a bad contractual bargain (IEL v Boyes  47 EG 140 and Chemidus Wavin  3 CMLR 514). This could result in remedies being granted in favour of third parties but not in favour of the contracting parties themselves. Such a limitation would clearly not arise in relation to an action for damages for infringement of the Chapter II prohibition, which would, by definition, be brought by a third party.
For an injured third party, a complaint to the OFT under the Chapter I or Chapter II prohibition is likely to provide a relatively cost effective route to redress, particularly given the Director General's ability to take interim measures and the absence of a requirement for the complainant to provide a cross undertaking in damages (which would be necessary in the context of an application for an interlocutory injunction in the courts). However the Director General has no ability to award damages for breach of the prohibition, unlike the courts.
The various sector regulators (such as OFTEL, OFFER, OFGAS, OFWAT and ORR) have concurrent powers with the Director General, so that a sector regulator may give guidance, consider complaints about alleged breaches of the prohibitions, impose interim measures, consider notifications for a decision, grant exemptions, carry out investigations, impose penalties and enforce decisions (section 54 and Schedule 10). The Director General alone, however, has the power to issue guidance on penalties and to make and amend the Director General's rules which set out the procedures to be followed during investigations or enforcement proceedings under the 1998 Act. In order to ensure full co-ordination between the sector regulators and the Director General, a Concurrency Working Party was formed in 1997. The Working Party will continue in operation after the 1998 Act is implemented. The OFT has issued a formal consultation draft on the concurrent application of the 1998 Act to the regulated industries which explains how cases will be handled in practice, and how it is intended to ensure consistency of decision making.
The 1998 Act will revolutionise the way in which competition law is enforced and administered in the UK. Apart from the relatively limited role of the Restrictive Practices Court under the RTPA 1976 and the common law restraint of trade doctrine, the old system was primarily administrative and political with very limited judicial involvement. These limitations and policy driven checks and balances will be swept away once the substantive provisions of the 1998 Act enter into force on 1st March 2000.
The system of enforcement under the 1998 Act includes a major role for the Competition Commission, as well as the courts (see inset box "Institutional structure").
The parties involved and any affected third parties will have an automatic right of appeal against decisions of the Director General to an appeal tribunal of the Competition Commission.
Appeals may be made from an appeal tribunal to the Court of Appeal on points of law and on the level of penalty.
There is likely to be scope for references for preliminary rulings to be made to the ECJ for interpretation of EC competition law underlying the 1998 Act from an appeals tribunal but possibly not from the Director General (the case law of the ECJ has not clearly dealt with the question of the circumstances in which the ECJ may aid the interpretation of national law (which is based on EC law) rather than simply EC law itself).
The criminal courts can impose criminal penalties on individuals that fail to comply with the various requirements imposed on them during the course of the Director General's investigations (see "Offences" above).
Third parties will more readily be able to seek redress in the High Court for damages and/or an injunction (see "Third party court actions" above).
However, despite this increased emphasis on judicial involvement, a number of anomalies will remain:
The political decision-making role of the Secretary of State will remain in relation to scale and complex monopolies.
The wide-reaching remedial powers available to the Secretary of State under Schedule 8 of the FTA 1973 (which include the remedy of divestment) remain effectively outside the scope of judicial control, given the reluctance of judges to overturn decisions involving the exercise of discretion by regulators, which is a major limitation of the judicial review process.
The judicial review process under Order 53 is likely to remain the only means of controlling the exercise by the Director General of his investigatory powers.
The courts will, presumably, continue to apply the common law restraint of trade doctrine alongside the Chapter I and Chapter II prohibitions, although the doctrine might be expected to wither in competition cases (but probably not in employment law cases) as the case law under the 1998 Act develops and subsumes the more limited scope of the doctrine.
The Competition Commission. The Competition Commission is a new body created by the 1998 Act which will take over the existing functions (relating primarily to the review of monopolies, mergers and the regulated utilities) of the Monopolies and Mergers Commission (MMC). It will comprise three panels of members: the appeal panel (whose members will sit on appeal tribunals), the reporting panel (which deals with the bulk of merger and monopoly inquiries), and the specialist panel whose members will continue to be appointed by the Secretary of State and which deals with specialist sectors including newspapers and electricity.
The reporting panel will continue to investigate mergers, references under sector regulators' licensing regimes and a reduced number of monopoly references (given the guidelines that have been issued in relation to the limitations imposed on the making of scale monopoly references (see Part I of this article "Scale monopolies").
Following the introduction of the Chapter II prohibition, Margaret Beckett (the then Secretary of State for Industry) indicated that the scale monopoly provisions of the FTA 1973 were intended to be used where a prior infringement of the prohibition had been proven, but where the Director General believes that there is a real prospect of further abuse by the same company. The OFT's formal consultation draft on the Major Provisions of the 1998 Act also adds that the scale monopoly provisions are intended for dealing with an abuse which is likely to recur due to structural deficiencies.
The appeal tribunals will hear appeals against decisions of the Director General and the sector regulators under the Chapter I and Chapter II prohibitions. They will be more judicial in their functions than the MMC, but it is intended that they will retain flexibility to deal with cases speedily. The president of the appeal tribunals (who is yet to be appointed) must be legally qualified, as must those members of the appeal panel who will chair individual tribunals. The president is appointed by the Secretary of State in consultation with the Lord Chancellor and must be someone with appropriate experience and knowledge of competition law and practice.
Appeals will be on the full merits of the case and will therefore involve a full re-hearing. This is wider than under the EC system where appeals are limited to the various judicial review grounds set out in Article 173 of the EC Treaty. Third parties with a sufficient interest in the Director General's (or sector regulators') decision and bodies representing such persons will also be able to appeal to an appeal tribunal. This is a wider range of third parties than can appeal under the EC system. Appeals beyond the appeal tribunals lie to the Court of Appeal (and its equivalents in Scotland and Northern Ireland) on points of law and level of penalty, and from the Court of Appeal to the House of Lords.
A third party (who is not the subject of a decision) may apply to the Director General asking him to withdraw or vary a decision within one month of publication of the decision, if deemed to have a sufficient interest by the Director General (section 47). If the Director General rejects such an application, the third party may appeal to the Competition Commission against that decision.
Given that the tribunals will have the ability to engage in a full re-hearing, but not to carry out investigations into the facts, it is likely that the parties and the OFT will be under a much heavier burden to carry out market surveys and research than has previously been the case, which may make appeals relatively costly.
Appealable decisions. Decisions against which appeals may be brought include a decision:
That the Chapter I or Chapter II prohibition has been infringed.
To impose a penalty for infringements of the Chapter I or Chapter II prohibitions.
As to the amount of any such penalty.
In relation to individual exemptions as follows:
to grant an individual exemption;
to impose any condition or obligation when granting an individual exemption;
as to the contents of any condition or obligation imposed on the grant of an individual exemption;
as to the length of any individual exemption;
as to the starting date of an individual exemption;
to extend the length of an individual exemption;
as to the period which to extend an individual exemption.
To cancel an exemption (whether an individual, parallel or block exemption).
To withdraw or vary a decision following an appeal by a third party.
The rules of procedure for appeals have yet to be drafted.
The 1998 Act focuses primarily on the effect of agreements and practices rather than their form. Although this is a radical shift in focus, many firms, particularly those that have international businesses (and should therefore already be complying with EC competition law) should not have to embark on radical changes in their behaviour. Indeed, this is the approach that is, on one level, being taken by the OFT in their various guidance notes, and is illustrated, in particular, by the approach to dual notifications (see inset box "The relationship of the 1998 Act with EC law").
However, the 1998 Act marks a radical departure from existing competition law and companies will need to ensure that they are fully prepared in time for the commencement of the prohibitions on 1st March, 2000, particularly given the penalties that can be imposed for infringement. It is inevitable that firms in the UK are likely to find themselves under much closer scrutiny than has been the case to date, given that the European Commission has to enforce EC competition law across 15 member states.
Complying with the Chapter I prohibition. For many companies that have had limited exposure in trading throughout the EC, much greater efforts will need to be taken to ensure that all agreements and practices, and in particular, contacts with competitors comply with competition law.
John Bridgeman, the Director General, has emphasised on a number of occasions that one of the main reasons for the delayed starting date for the prohibitions is to enable companies to have sufficient time to review their existing practices and to comply with the new law. OFT officials clearly believe that a significant number of cartels persist in the UK to the detriment of the UK economy and are likely to seek to use their powers of investigation and enforcement rigorously to eradicate such practices. Accordingly, compliance programmes should focus particularly on contacts with competitors, not only in relation to the classic smoke filled room scenario, but also in the context of trade associations and other industry bodies such as working parties and trade shows. Sensitive areas will include not only the classic cartel agreement to fix prices, limit price increases or restrict discounts, share customers or allocate territories, or engage in collusive tendering, but also discussions on marketing and R&D initiatives, cost reduction programmes and any arrangement to exchange sensitive commercial information. Moreover, even if a cartel type agreement is limited in scope (to a very local area or a small number of firms in a market), the Director General is likely to commence infringement proceedings, even though the arrangement may have "failed" to deliver the anticipated benefits.
Complying with the Chapter II prohibition. Given the possibility of local geographical markets being defined in the context of the Chapter II prohibition, firms that may occupy a dominant position in a local market will need to educate their employees as to the type of conduct that could, potentially, be abusive.
Given the difficulties experienced by the OFT in enforcing existing competition law against predatory behaviour in the context of the bus industry, it would seem inevitable that very close regulatory attention will be paid to these, and similar, sectors. Moreover, as such markets tend not to be international in their scope, existing operators may have little awareness or experience of Article 86 of the EC Treaty. Accordingly, the adoption of an effective compliance programme dealing with such matters as market definition (both product and geographical), the assessment of market power and a clear list of do's and don'ts set out in an easy to understand, market related, context is essential. Although the 1998 Act introduces an entirely new legal framework, for those industries and firms that have been the subject of monopoly inquiries under the FTA 1973, the MMC's conclusions as to whether particular forms of conduct are contrary to the public interest will continue to provide a useful indication as to the acceptability of particular trading practices.
A number of primarily oligopolistic markets have, over the years, been the subject of general inquiries from the OFT under the RTPA 1976 in relation to, for example, correlated price changes. It may well be the case that a number of files that have not been acted on may be re-examined in the run-up to March 2000 when the Chapter I and Chapter II prohibitions come into force.
Since Part I of this article was published, the OFT has issued formal consultation drafts of its guidelines to the Act. The most significant change is in relation to the Director General's approach to assessing the appreciability of agreements under the Chapter I prohibition.
The Director General takes the view that an agreement will have no appreciable effect on competition if the parties' combined shares of the relevant market does not exceed 25% (OFT formal consultation draft guidance note on the Chapter I prohibition).
However, the Director General will generally regard any agreement between undertakings which amounts to a cartel, or imposes minimum resale prices, or is part of a network of similar agreements which have a cumulative effect on the market in question as being capable of having an appreciable effect even where the parties' market share is below 25%.
Nigel Parr is a partner at Ashurst Morris Crisp
Prepare a written response plan for all staff who may come into contact with the investigating officials, for example, receptionists should be told to contact the company lawyer as soon as the officials arrive and to ask the officials if they will wait until a lawyer is present.
Check the investigating officer's identification documents.
If the dawn raid is being carried out without a warrant, check the scope of the written notice (subject matter and purpose) or the evidence of authorisation (in cases where notice has not been given).
If the dawn raid is being carried out with a warrant, check the warrant (subject matter and purpose).
Form a team of staff who are authorised to represent the company in the investigation, and identify the decision maker within the company for the purpose of the raid (usually the company lawyer). Make sure the officials have this information.
Try to ensure that a business client is available for the lawyer to consult if any management decisions need to be made and to ensure access to documents, when required and directed by the lawyer.
Take into account the risk of committing a criminal offence, if you do not co-operate with the investigation.
Set up a dedicated room where the officials will be based, where files and documents will be brought for review, and where all reviews and discussions will take place. Outside this room, officials should be escorted at all times, preferably by a lawyer and not allowed to wander or conduct questioning unless accompanied.
If the officials question employees about company documents, keep a record of the questions and answers.
Before providing any information or document, review it for scope, relevance and legal privilege during a raid.
Where the officials request copies of documents, take copies for the company files and if they are confidential, mark them as such when copied.
Ensure that officials do not take copies of legally privileged documents whether generated by external counsel or in-house counsel (whose advice is also privileged under the 1998 Act, but not under EC law).
Review the investigation and, if any inaccurate information has been given, whether in documents or in the answers given to questions, make sure it is rectified straight away.
Sanction on summary conviction
Sanction on conviction on indictment
Fail to comply with a requirement imposed under the investigation powers.
Fine of up to the statutory maximum (currently £5000).
Intentionally obstruct an officer carrying out an on-the-spot investigation (dawn raid) without a warrant.
Fine of up to the statutory maximum.
Intentionally obstruct an officer carrying out an on-the-spot investigation (dawn raid) with a warrant.
Fine of up to the statutory maximum.
Unlimited fine and/or up to two years' imprisonment.
Intentionally or recklessly destroy, dispose of, falsify or conceal a document the production of which has been required or cause or permit its destruction, disposal, falsification or concealment.
Fine of up to the statutory maximum.
Unlimited fine and/or up to two years' imprisonment.
Knowingly or recklessly provide information that is false or misleading in a material particular.
Fine of up to the statutory maximum.
Unlimited fine and/or up to two years' imprisonment.
Part of the rationale for the 1998 Act was the perceived benefit of ensuring, so far as possible, that UK competition law should mirror EC competition law. It is therefore important to understand the key EC competition law concepts which underpin the new Act (see inset box "Key EC law concepts" in Part I of this article). In understanding the relationship between domestic and EC competition law, three areas are of particular importance:
The so-called double barrier of domestic law and EC law.
The governing principles clause (section 60, 1998 Act).
In essence, the concept of a double barrier, which is based on case law of the ECJ, means that national competition law must not be more permissive than EC law but can be more restrictive. To ensure compliance, therefore, companies should ensure that their agreements satisfy the requirements of both EC and national law.
Articles 85 and 86 of the EC Treaty are directly applicable and produce direct effects, which means that they give rise to rights and obligations on the part of individuals and companies that national courts have a duty to enforce (BRT v SABAM  2 CMLR, 238). Although the national courts are empowered to apply Articles 85 and 86 in proceedings before them and grant appropriate national remedies for infringement of their provisions, they (and other national administrative tribunals and regulatory authorities) will also apply relevant provisions of national competition law.
The relationship between the various provisions of national law and EC law is complex. The ECJ has ruled that conflicts between the rules of EC law and national rules in relation to cartels should be resolved by applying the principle that EC law takes precedence (Walt Wilhelm v Bundeskartellamt Case 14/68  CLMR 100). However, the judgment did not consider the circumstances in which such conflicts may arise. It is relatively clear that if EC law prohibits certain actions or particular provisions in an agreement, national law cannot be more permissive, based on the principle of the supremacy of EC law over national law. However, it appears to be open for national authorities to be more restrictive than the position under EC law.
This view is supported by the reasoning of the Monopolies and Mergers Commission (MMC) in their 1993 inquiry into the supply of fine fragrances (CM2380), where the MMC considered that it was open to them to examine the effects of certain distribution systems on the UK public interest, to make findings and, if they thought fit, to make recommendations, notwithstanding that the European Commission had granted Article 85(3) exemptions in relation to two of distribution systems and had indicated its willingness to grant comfort letters in relation to others.
The MMC took a similar approach in their 1997 inquiry into the supply of electrical goods.
In the light of Walt Wilhelm and the approach of the UK regulatory authorities to date, the cautious approach in drafting commercial agreements has been that an agreement will only be enforceable where it satisfies the requirements of both EC and domestic competition law (and therefore satisfies the double barrier created by both systems of law).
Parallel exemptions and the double barrier. The 1998 Act appears to adopt the double barrier test in its treatment of parallel exemptions, giving the Director General the power to be more restrictive in his treatment of agreements under the 1998 Act than is the case at the EC level. The August 1997 consultation document which introduced the Competition Bill simply states that agreements which have been granted an individual exemption or qualify under an EC block exemption will be automatically exempt from the UK domestic prohibition. No reference is made in the document to the power of the Director General to vary or remove the exemption in certain circumstances. However, under the 1998 Act, the Director General may:
Impose conditions or obligations subject to which a parallel exemption is to have effect.
Vary or remove any such condition or obligation.
Impose one or more additional conditions or obligations.
Cancel the exemption.
(section 10(5),1998 Act)
Breach of a condition imposed by the Director General has the effect of cancelling the exemption (section 10(5)(d)). The OFT's draft guidance note gives no indication as to the circumstances in which the Director General is likely to exercise these powers. However, given the reasoning of the MMC in their inquiries into the supply of perfumes and electrical goods, it would seem that there is a reasonable prospect of the Director General exercising these powers in circumstances where the conditions of competition in the UK are materially different from those in other member states and where the EC Commission has not carried out a detailed investigation into the UK market.
Such a decision would, however, be subject to appeal to the Competition Commission, and it is probably only a matter of time before a reference is made to the ECJ under Article 177 of the EC Treaty (which provides for the ECJ to aid national courts in their interpretation of EC law) seeking further clarification of the Walt Wilhelm judgement, particularly in the light of two opinions by one of the Advocates General of the ECJ who took the view that, since agreements benefitting from an exemption under Article 85(3) are liable to affect trade between member states and therefore fall in principle within the prohibition set out in Article 85(1), the national authorities cannot ignore the exemption granted to them under EC law. Otherwise, not only would a given agreement be treated differently depending on the law of each member state thus detracting from the uniform application of community law, but the full effectiveness of a community measure, such as an exemption under Article 85(3), would also be disregarded (Case C-266/93 Bundeskartellamt v Volkswagen and Vag Leasing  ECR I - 3477, 3502). Such a reference would focus attention on the legality, under EC law, of the powers of the Director General to add conditions to, or cancel, a parallel exemption (under section 10 of the 1998 Act) where an exemption has been granted under EC law.
In practice, parties may make dual notifications for negative clearance or exemption to both the Director General and the European Commission. The OFT consultation draft guidance note on the Chapter 1 prohibition indicates that where trade between member states is affected, the appropriate authority for notification is likely to be the European Commission rather than the Director General given the fact that only the Commission can give an exemption from Article 85(1), and given the existence of the parallel exemption process whereby an agreement which is the subject of an individual block exemption under Article 85(3) is automatically exempt under the UK legislation (see "Chapter I exemptions" in Part I of this article). In addition, notification to the European Commission has the following effects:
Provisional immunity from penalties under the Chapter I prohibition is available without having to notify the agreement to the Director General; in addition, the Director General may not impose a penalty under Chapter I if an agreement has been notified to the Commission and the Commission has not formally determined the matter.
Under the parallel exemption provisions, in cases where the Commission makes a formal decision exempting the agreement under Article 85(3), the agreement is automatically exempt from the Chapter I prohibition.
However, the guidance note recognises that in borderline cases where it is unclear whether trade between member states is affected, parties may wish to consult with the OFT in order to discuss the most appropriate way to proceed. Even in these circumstances, in genuine borderline cases it should not be necessary to notify both authorities at the outset but parties may notify the Director General where the Commission informs them that it intends to decline jurisdiction or where the validity of an agreement has been challenged in the context of proceedings in the UK courts. In such circumstances the Director General would consider granting an exemption with retroactive effect.
The draft guidance note on the Chapter 1 prohibition states that where dual notifications have been made and following liason between the OFT and the Commission it is clear that the Commission will deal with the agreement either by formal decision or comfort letter, the Director General will generally take no further action.
However, the guidance note states that, exceptionally, the Director General may proceed with a notification that has been made to him as well as the Commission where:
The agreement raises particular concerns in relation to competition in the UK which do not arise in other member states. In the Director General's view, it will be rare for an agreement to have such a sufficiently serious and distinct effect on UK competition. However, in practice, such cases may be less rare than the Director General appears to suggest, given the inquiries that have taken place into the beer, electrical goods, perfumes and similar markets, notwithstanding the existence of EC block or individual exemptions; and/or
The agreement involves important legal, economic or policy developments, or it is clear that the parties have a legitimate interest in obtaining a decision or guidance.
Notwithstanding the difficulties identified above, the general policy stance of the OFT would seem to be clear: it is not encouraging parties to make "fail safe" notifications where a notification has been or perhaps should have been made to the European Commission.
The 1998 Act requires those applying the Chapter I and Chapter II prohibitions (essentially the courts, appeal tribunals and the OFT) to ensure as far as possible that there is no inconsistency (subject to relevant differences between the provisions concerned) with the way in which Articles 85 and 86 have been interpreted by the ECJ or the European Court of First Instance (CFI). There is also a duty to have regard to any relevant decision or statement of the European Commission (section 60, 1998 Act).
This "governing principles" provision is completely new to English law and is likely to cause difficulties in interpretation as its meaning is not entirely clear. The OFT consultation draft on the Major Provisions of the Act states that the obligation to have regard to "relevant differences" means that there will be certain areas where EC legal principles will not be relevant, for example, the objective of establishing a European single market.
Although a large volume of case law has been developed applying Article 85 to agreements and practices aimed at preventing or limiting parallel imports between member states (see Part I of this article), which would appear to fall outside the domestic scope of the Chapter I prohibition as a result of the governing principles clause, many of those cases have been important in establishing when an agreement (as opposed to unilateral conduct) will exist under Article 85(1).
Accordingly, it may be premature to conclude that section 60 will exclude a significant amount of "irrelevant" EC case law, and a number of appeals to the Competition Commission may be generated in practice. Whatever the likely approach of the courts to the application of section 60, it is important to note that since the facts and economic circumstances are often case specific in competition law cases, for example, a particular discounting structure may be anti-competitive in one market but not in another, it may be doubted how relevant most EC jurisprudence will ultimately prove to be.
The Director General has already stated that he is likely to take into account the existence of a compliance programme in determining the amount of penalty to be imposed on an undertaking in breach of the Chapter I or Chapter II prohibition. However, simply having a compliance programme is unlikely to be sufficient to mitigate a penalty if it has not been actively implemented, evaluated and regularly audited.
The consequences of not complying with the new regime will be more significant than previously, so it is vital that compliance programmes are adapted to take account of the new regime. For companies that have already introduced an effective EC competition law compliance programme, the changes introduced by the 1998 Act will require manuals to be updated and training sessions to focus on the key changes such as the possibility of markets being defined more locally within the UK and the introduction of the various criminal offences for impeding OFT investigations. However, the changes should not impose a significant additional burden on such firms.
The impact of complying with the new legislation is likely to be greatest on companies that have had little experience of trading throughout the EC. For such companies, particularly those without in-house lawyers, the initial burden may be more significant. However, even in these cases, given the Director General's proposed approach to appreciability (broadly, apart from cartels, resale price maintenance and networks of similar agreements, an agreement will only have an appreciable effect on competition where the parties enjoy 25% or more of the relevant market), introducing an effective compliance programme should not be unduly costly.
Such a programme should focus on the "per se" infringements which generally involve contacts with competitors and exploitative or exclusionary behaviour by an undertaking with a high share of a properly defined geographical market. The key burden in such cases is likely to be encouraging employees that have not been in the habit of thinking about competition law to be aware of the possible pitfalls, but without unnecessarily inhibiting their business conduct, which is the aim of all good compliance programmes.
The following diagrams are also available in the PDF version of this article:
OFT investigatory powers [flowchart]
Institutional structure [flowchart]