Competition law is the government regulation of business with the goal of preventing and prohibiting anti-competitive behaviour and unfair business practices. It involves the regulation of the continuous struggle of companies for superiority by attempting to maintain fair competition so that all people and companies can benefit from competitive prices, product choice and quality services. In the US, this area of law is called “antitrust” because the area of law was originally designed to regulate the behaviour of “business trusts”, more commonly known today as “cartels”.
What kinds of activities are regulated by competition law?
Competition law covers the regulation of many different kinds of activities. Some examples are the following:
Abuse of a dominant position (Also called “misuse of market power” and “single firm conduct with respect to monopolization”) – It is not illegal to be a monopoly (i.e. a single firm in a dominant position) per se, but governments do regulate monopolies more closely than other companies since, on their own, they possess the power to easily engage in business practices which may be particularly harmful to consumers or to other competitors. Whether or not a company is a monopoly is part of the competition law analysis and depends on factors such as the definition of the product market and the geographic market. Competition law provisions on abuse of dominant position deal with the actions of both single-firm monopolies as well as a group of dominant firms.
Competition law regulates the behaviour of firms in dominant positions to ensure that they do not, or are not likely to, behave anti-competitively or substantially lessen competition in a market. The purpose of this kind of regulation is to preserve competition within markets and promote effective competition, and not necessarily to protect individual competitors. Monopolies are prohibited from engaging in activities that firms not in a dominant position may be allowed to engage in, for example:
exclusive agreements – practices whereby a supplier requires or induces a customer to deal only with primary products designated by the supplier (can also be termed “single branding agreements”, “exclusive purchasing”, “exclusive dealing”, “requirement contracts” or “non-compete obligations”) or to refrain from dealing with products except as supplied by the supplier (such as through limited distribution, resale price maintenance or market partitioning). An example of this is when a sugar substitute company coupled (i) price discounting when a customer used the sugar substitute’s own brand name and also (ii) provided discounts for the promotion of products containing only their particular sugar substitute.
tie-in agreements (also termed “tying agreements”, “tied in agreements” , “product tying” or “bundling”) – practices whereby the supplier requires that the customer purchase a second (tied) product from the supplier of a first (tying) product. This may be written into the contract or done through some other means. The supplying firm uses its market power in relation to the tying product to induce the customer to buy the tied product. For example, a manufacturer of nail guns and nail cartridges might require customers to purchase nails exclusively from it. Another famous example is when Microsoft required that purchasers of the Windows 95 operating system also acquire Internet Explorer web browser.
refusal to supply – Also called “refusal to deal”. This involves the situation where a buyer cannot obtain supplies of a product on usual trade terms from a dominant firm and is, as a result, substantially affected in its ability to conduct business, and competition is thereby adversely affected. This can essentially be a company boycotting a supplier or a customer. The competition authorities may decide that the dominant firm has an obligation to supply to other firms, especially if the dominant firm offers an “essential facility”. For example, a railroad company that controlled a railway, including bridges and switching yards was forced to allow competing railway companies to use its railway facilities.
exploitative pricing practices – An example of this would be “price discrimination” where goods are sold or purchased at prices not related to cost. One form of price discrimination is discounts or rebates which aim to bind customers to the producer, rendering it too difficult for new competitors to enter the market. For example, a sugar company in Ireland granted “sugar export rebates” to customers exporting outside Ireland but customers selling in Ireland received no rebate. Another example is a company which offered loyalty payments to builders’ merchants in Great Britain who stocked only their merchandise.
In the EU, Article 82 of the EC Treaty deals with the regulation of the behavior of the single, dominant firm or “undertaking”. In the US, both the Sherman Act and the Clayton Act are designed to regulate monopolies.
Mergers -When all or part of one business is acquired by another business, competition authorities may review the merger to determine whether the transaction will, or is likely, to substantially prevent or lessen competition in the relevant market (US, UK, Canada) or whether the merger will create or strengthen a dominant position resulting in the obstruction of effective competition (EU). Merger control is usually carried out in the public interest and not in the interest of shareholders – mergers may be prevented or altered if it is predicted that the market would be less competitive, and thus consumer welfare would be harmed, should the merger be allowed to proceed. In reviewing mergers, competition authorities consider many different elements, including the level of economic concentration in the relevant industry and the merging parties’ market shares. In the EU, the term “concentration” may also be used instead of “merger”.
Normally, mergers are not prevented by competition authorities but rather they may require a change in the structure of the deal in order to dampen or eliminate any predicted anti-competitive effects. For example if the resulting firm may be deemed to be too dominant in one area, competition authorities may require that the merged entity sell a certain part of its business in order to obtain merger approval. For example, when two wine and spirits companies planned to merge, competition authorities required that one of them sell certain spirits brands to a third party so that the merged entity would not be the only company selling that kind of spirit. However, one famous example of EU competition authorities preventing a merger occurred in 2001 when General Electric planned to merge with Honeywell. The merger was prevented as the EU felt that it would cause a sever reduction of competition in the aerospace industry. The case made headlines since the merger had already been approved by US antitrust authorities and it was the first time that a proposed merger between two US companies had been blocked solely by European authorities.
Cartels – Competition law also regulates the behaviour of firms in order to prohibit cartel-like activity which would enable firms to collude together to fix prices, limit supplies, divide markets or engage in other anti-competitive practices. Not all agreements between companies are considered to be anti-competitive (for example joint ventures, partnership agreements and research agreements are usually not anti-competitive), but agreements are evaluated depending on their effects on competition and whether they result in undesirable restrictive trade practices.
Different language is again used to discuss this issue in different jurisdictions. In the EU, Article 81 of the EC Treaty stipulates that all “agreements, decisions or concerted practices” between firms can be evaluated in light of competition rules. Both “horizontal agreements” (agreements between companies at the same level of production) and “vertical agreements” (agreements between companies at different levels of production) are often discussed separately. The UK Competition Act also refers to agreements that may have an effect on competition. The Sherman Act of the US states that every “contract, combination or conspiracy” in “restraint of trade” is illegal. In Canada, the vocabulary used in the Canadian Competition Act is also that of “conspiracies”.
In several countries, criminal sanctions can be imposed on parties found in breach of the relevant cartel provision (such as in Canada, France, Germany, Greece, Ireland, Japan, Korea, Mexico, Norway, Slovak Republic and the US).
The relationship between intellectual property law and competition law
Intellectual property law includes the regulation of patents, designs, copyrights and trademarks. In essence, the law grants to an owner of an exclusive right the power to behave in a certain monopolistic manner. For example, the owner of a patent may prevent others from producing the invention for a certain period of time. An obvious conflict therefore exists between intellectual property law, which aims to confer exclusivity upon right owners, and competition law, which aims to keep markets open and prevent exclusive behaviour. This is an interesting dilemma which has led some governments to react with tools such as compulsory licensing – where an owner of a patent is forced to license its product to another firm so that the product can be produced by a competitor. This discussion is relevant, for example, to pharmaceutical companies which have patents for certain medication and as a result, the people who need the medication often cannot afford it (such as AIDS medication in Africa). Another example is the European Commission’s requirement that Microsoft remove clauses from its software licences which provided for both minimum distribution volumes of Internet Explorer and also a prohibition against the advertising of competitor web browsers.
Competition law in practice
Lawyers who practice competition law often work either for the government or for a private law firm.
Private practice competition lawyer
Lawyers who practice competition law in a private law firm have a wide variety of tasks. If the firm is a large commercial law firm, one of the most common tasks would be assisting the mergers & acquisitions department by obtaining approval from the competition authorities for any contemplated merger. This usually involves research into the relevant product and geographic market to determine market share of the proposed merged entity and arguments about why the proposed merger does not have any anti-competitive effect. This information is then submitted in written form to the relevant competition authority which will approve or forbid the merger to go through or allow the merger with certain changes, such as the divestiture of certain areas of business or assets. The latter may occur if the competition authority decides that the merged entity has too much market power in one product or geographic area and aims to allow for a more competitive market in that area. Sometimes the competition authority will also have a meeting together with all interested parties so that they can understand every party’s side better.
Another common activity of the competition lawyer in a private law firm is assisting companies to ensure they comply with competition law rules. For example, companies may check with their competition lawyer to ensure that proposed discounts, rebates or other pricing policies do not violate competition law. This would involve the lawyer reading through documents such as supply or distribution contracts or offers made to customers or potential customers regarding pricing. Companies might also ask the competition lawyer to review other customer contracts to ensure that the provisions do not add up to anti-competitive behaviour (for example, non-compete clauses, long-term customer contracts with automatic renewal or strict conditions for termination, excessive liquidated damages and rights of first refusal in the same contract may be deemed as anti-competitive behaviour).
Government competition lawyers
A competition lawyer working for the government usually works for the competition authority (or “competition regulator”) such as the DG Competition in the EU, the Federal Trade Commission and the Department of Justice in the US, the Office of Fair Trading and the Competition Commission in the UK, and the Competition Bureau in Canada. Lawyers who work for competition authorities ensure that competition laws are being followed and will perform such tasks as reading and deciding on applications for mergers, ensuring “liberalisation” or the opening up of markets to competition, and investigating the behaviour of companies to determine if any competition laws are being violated. In some countries, private parties may complain directly to the competition authorities regarding any suspected anti-competitive behaviour and the authority will conduct their investigation based on this complaint. Competition authorities are also often involved in competition litigation cases where competition law violations are tried in court.
In the EU, the DG Competition (Directorate General Competition) is headed by the Commissioner and has the mission of enforcing the competition rules of the European Union treaties. It is located in Brussels, Belgium and is similar to a government ministry.
In the US, the Federal Trade Commission (“FTC”) exists to promote consumer protection and to prevent anticompetitive trade practices. It is an independent agency of the government of the United States. Five commissioners head the FTC together, all of whom are nominated by the President and confirmed by the Senate. The Department of Justice (“DOJ”) Antitrust Division enforces both criminal and civil antitrust laws whereas the FTC regulates only civil antitrust laws together with the Department of Justice. The DOJ is a Cabinet department in the US government administered by the Attorney General.
This has only been a brief summary of some of the main areas of competition law. For more information, please visit the following websites:
Federal Trade Commission
US Department of Justice: Antitrust Division
UK Competition Commission
UK Office of Fair Trading
Canadian Competition Bureau
Australian Competition and Consumer Commission
South African Competition Commission
International Competition Network
OECD Competition Homepage
WTO and Competition Law