UK Competition Law Newsletter

12th March 2008

The United Kingdom has had a serious competition law regime now for over 10 years. Serious in this context means no less than five ostensibly independent enforcement agencies with powers to impose financial penalties (appealable before a genuinely independent tribunal).

Add to that, a leniency policy borrowed from the EU (and ultimately the US) that is bringing a lot of whistleblowers forward, and you would think that the system should be working satisfactorily. That this is not so, is illustrated by the following recent events.

A sectoral enforcement agency imposes a substantial fine for the first time for breaches of competition law

In a little noticed report carried out by the Treasury quite recently, the sectoral enforcement agencies (OFWAT for the water industry, OFGEM for gas and electricity, OFCOM for telecommunications and ORR for the rail industry) were taken to task for their failure to issue any formal decisions and their preference for settling complaints behind closed doors. The Treasury felt this modus operandi was undermining the deterrent effect of the legislation: infringe then negotiate a change of behaviour seemed to be the message to the former nationalised monopolies.

Whether in a response or not to the Treasury’s criticisms, OFGEM last month fined National Grid over £40 million for anti-competitive behaviour in the domestic gas meter market. The company has appealed this decision but at least one sectoral regulator has now shown that it is prepared to get its feet wet.

Less encouraging for those who saw the new regime as being a break from the political interference of the past, was the decision three days earlier to launch a probe into the energy market arising from totally unsubstantiated allegations of price fixing in the press which were seized upon by a parliamentary committee. The whole industry will now be subject to a thorough going over when no evidence of any wrongdoing had been provided – as OFGEM’s press release itself emphasised.

BSkyB’s ‘merger’ with ITV – a political decision?

The impression that the enforcement agencies are not entirely free from the influence of the political climate in the UK is never entirely dispelled. This impression is reinforced by the Competition Commission’s recent decision to require divestment of BSkyB’s 17.9% stake in ITV. Mergers in the media field leave a more explicit role for politicians – but only where a merger raises concerns about freedom of expression. According to the Competition Commission, no such issues arose in BSkyB’s acquisition of a shareholding which was principally designed to scupper a bid for ITV by Virgin – a company which has been vociferously lobbying the government  on a number of fronts in recent months.

Under the Communications Act, which covers the industry as a whole, Sky was explicitly permitted to buy up to 20% of the shares of its competitor ITV. It was nevertheless accepted that acquisitions of lesser percentages were capable of being examined under the merger control provisions of the Enterprise Act, but only in exceptional circumstances. Custom and practice suggested that the regulators could look at cases where acquisition of a shareholding of 15% took place with a view to establishing whether the acquirer could exert material influence over the target, and therefore substantially limit competition.

The Competition Commission objected to Sky’s shareholding of 17.9%. This was so even though they did not expect it to appoint a director and that 17.9% was at the lower end of levels that have (in very few cases) been considered to confer material influence. Perversely, the fact that Sky might have objected to a proposed action by ITV was considered enough to exert influence since ITV (chaired now by Sir Michael Grade) would be deterred from getting into an argument with a minority shareholder, particularly one with Sky’s industry knowledge.

The violence done to the language of the legislation by this interpretation might make sense in normal circumstances where a company has to listen to a vociferous minority shareholder because it can increase its share substantially. However this could not apply here, since by law, Sky could never acquire more than 20% of ITV’s shares! All that remained as justifications for the Competition Commission finding was Sky’s (theoretical) ability to block a special resolution.

Not only did the Commission object to 17.9% but recommended that Sky’s shareholding be reduced to as little as 7.5%, a recommendation accepted by the Secretary of State. Sky will now appeal, and the Competition Appeal Tribunal will have an opportunity to decide whether enforcement agencies can change the ground rules. It will be very interesting to see how the Tribunal under its relatively new Chairman will deal with this challenge.

Private enforcement – still in its infancy

If a real competition culture is to take root in the United Kingdom, private enforcement must be made easier, both for reasons of efficiency and because of the political dividends of de-centralisation. Here a huge amount of work still needs to be done.

The Office of Fair Trading is currently promoting greater use of ‘opt out’ class actions (not currently possible here) which would enable UK customers to obtain directly the sort of refunds recently made available to the US customers of British Airways and Virgin who were overcharged as a result of their agreement to fix the level of fuel surcharges on long haul flights between 2004 and 2006.

However even if this reform were to occur, such actions could only be brought in ‘follow on’ actions based on existing UK or EC infringement decisions. Not all infringements are (or can be) investigated by the enforcement authorities who are free to set their own priorities.

What is more, up to now the record of success of competitors injured by anti-competitive behaviour (who are not confined to ‘follow on’ actions) is so poor and the cost risks of litigation are so great that no one will lightly take such action before the courts. This is particularly the case since their experience of competition law is largely based on unmeritorious defences to patent infringement actions and they are therefore rather sceptical at best.

The government will continue to strive to find some half way house between the American system (perceived as a lawyer’s paradise) and the current enforcement black hole.

This weakness in the enforcement system (and its consequent impact on legal practice here) will be returned to again in the future issues.