Competition law: issues for professional risk management

Keeping track of change

One of the main issues in the competition field is keeping up to date with a rapidly developing area of law and regulation. The competition law regime in the UK has been revolutionised over the past few years with:

• the transformation of the law on restrictive agreements and abuse of a dominant position to a model based on EU competition law under the Competition Act 1998 (which came into force in March 2000)
• the updating of the merger control regime under the Enterprise Act 2002
• the introduction of the criminal cartel offence under the Enterprise Act
• the reform of the institutional structure by the Enterprise Act, reinforcing the roles
• of the Office of Fair Trading (OFT), the Competition Appeal Tribunal (CAT) and the Competition Commission
• the modernisation of EU competition law from 1 May 2004, which provided the UK competition authorities (the OFT and the sector regulators) with the full power to enforce EU competition law.

The pace of change at EU level has also been rapid. The modernisation process has devolved enforcement responsibility to national competition authorities and abolished the system for notifying agreements to the European Commission for clearance. This devolution of power has also required the publication of a number of complex guidelines by the European Commission on the application of EU competition law. There has, in addition, been a revision of the merger control rules and a new scheme for analysing technology transfer agreements. Further substantial changes are expected in the near future in relation to the rules on abuse of dominance and state aid.

Infringements of competition law can have very serious consequences including:

• fines of up to 10% of worldwide turnover. There have been a number of large fines in recent years, including a total of ¤855 million levied by the European Commission against the participants in the vitamins cartel
• actions by third parties for breach of the law – for example, claims for damages by customers of the vitamins cartel
• invalidity of certain provisions or agreements
• negative publicity and reputational damage.

Identifying the issues

Solicitors have an implied duty to protect their clients’ interests and to consult with them on any matters of doubt which arise during the course of the retainer. It is, therefore, important to set out in clear terms the scope and limits of the retainer and, in particular, to identify any issues upon which the solicitor will not be advising. Depending, of course, upon what he was asked to do, it is likely that, in the absence of a specific “carve out” or qualification, a solicitor’s duty will be found to extend to advising on the competition law aspects of a particular agreement, acquisition or other course of conduct.

A key area of risk is the failure to identify that a transaction raises a significant competition issue. Take the following examples:

• In the context of an acquisition, the purchaser being advised might place great value in the continued existence of a long-term exclusive supply agreement. It is possible for such exclusivity to be rendered invalid under competition law. Issues such as this need to be identified and addressed during the due diligence process.
• An acquisition might require merger control clearance. Often it will be straightforward to determine if a UK or EU filing is required but a check must also be made whether the transaction might trigger national notification requirements in other EU countries or elsewhere in the world. Different jurisdictions will have different requirements in relation to the time limits for making filings. A failure to notify a transaction in a foreign jurisdiction might result in invalidity under the national law and in the levying of fines.
• Obvious competition law concerns arise if a client communicates to his solicitor the existence and content of cartel-like agreements with competitors. The major issue in this sort of situation is to decide whether to seek leniency from competition authorities by confessing the contents of the arrangements. Many competition authorities offer reductions to, or even full avoidance of, fines as a reward for coming forward with a leniency application. The speed of the application will be crucial, however, as the largest reductions will only be available to the company which comes forward first. In March 2005, the OFT fined nine roofing contractors for bid rigging. The tenth participant in the cartel escaped any fine as it was the first to “blow the whistle”.
• As a result of the Enterprise Act, cartel activities can also now result in criminal law actions against individuals. As well as advising the corporate client, the solicitor should also be aware of the potential for any criminal law proceedings and the manner in which this could lead to a conflict of interest between advising the company and advising the individual.
• EU law provides that, if state aid is not notified and is later found to be illegal, then the aid must be recovered from the recipient by the relevant Member State. In the context of transactions involving government bodies or funds, state aid might well be involved. Recipients of such aid will need to be advised of the potential risks, as must financial backers. Indeed, funding for a project in some circumstances might need to be made conditional on securing a state aid clearance from the European Commission.

Practical steps for reducing the potential risk of claims include:

• internal training, to ensure that non-specialists know enough about competition law to be able to identify the existence, or potential existence, of an issue requiring specialist advice. There is, particularly in larger firms, a danger that young solicitors can become over-specialised and fail to identify the existence of issues outside of their narrow field of work
• involving a competition law expert early on in the process – for example, in the case of a potential acquisition, including a competition specialist as part of the team at the outset
• ensuring that competition law issues are dealt with by a specialist rather than by a generalist
• identifying time limits for filing merger clearances at an early stage in the transaction process and putting in place a reminder system to ensure that these deadlines are met
• seeking advice from a foreign jurisdiction where appropriate (usually at an early stage in the process).

Providing advice

Solicitors are under a duty to qualify advice where appropriate. An interpretation of the law is not necessarily negligent simply because it is not upheld, provided that the opinion was a reasonable one by reference to the standards of reasonably competent solicitors professing competition law expertise. Where the outcome of an issue is uncertain and there is, for example, a real risk of a particular course of action resulting in intervention by the competition authorities, this should be reflected in any advice, so that the client is in a position to make an informed decision as to the best way forward.

Advising on competition law issues often involves providing an assessment of risk, rather than definitive advice. Usually the position under the law will be dependent on the market presence of the companies concerned (with the higher the market share, the greater the chance of an issue arising). Advice will therefore have to be qualified by reference to the availability and reliability of such market information. For example, for companies in a dominant market position, some discounting practices may be illegal and raise the risk of fines by the competition authorities or actions by third parties for breach of the rules. Advice on the format of a discounting strategy would have to take into account the risk that a market could be defined narrowly by the authorities, so as to leave the client with a dominant position.

Practical steps for reducing the potential risk of claims include:

• defining at the outset the scope and limits of the solicitor’s duties in relation to competition law advice
• qualifying advice where appropriate and bringing to the attention of the client the potential for fines, invalidity or third party actions
• ensuring specialist advice is obtained where required – for example, advice from economists in relation to the interpretation of market data
• ensuring that all material advice is confirmed in writing, in order to avoid the risk of any misunderstanding and to minimise the risk of future disputes.