Competition Laws in the United Kingdom

Abstract

This essay looks at the role and importance of proceedings initiated by private individuals in the enforcement of competition laws in the United Kingdom. [1] The hurdles encountered since the enactment of the Competition Act 1998 and the Enterprise Act 2002 are examined, as well as the developments that have taken place within the European Union and the United States. It notes that although the protection of free competition may be justified ethically and economically, it is uncertain whether empowering private individuals will ensure that free competition is not restrained and monopolies are not abused. The paper then concludes that although it is important to strengthen and encourage private enforcement, there is much to be gained by equally strengthening public enforcement and consolidating the mechanisms employed in both forms of enforcement. As such, the individual that has suffered as a result of anti-competitive practices faces a number of disincentives that may be eliminated if private enforcement is effectively integrated into the public regulatory framework. Also, given the freedom of movement of goods and persons within the EU, it may be important to empower private individuals to enforce competition law at the level of the EU since this will enhance certainty and reduce the incidence of forum shopping and the cost of re-litigating and translation.

The Rationale of Private Enforcement

The genesis of anti-competitive practices and rules to prevent them may logically be traced to the first social processes geared towards achieving an advanced stage of development. Some indications for the implementation of competition rules in Europe come from the Roman era. The Lex Julia de Annona enacted in 50 BC imposed hefty fines on persons that intentionally or negligently prevented ships transporting grain from getting to the port. [2] Some three centuries later, the Diocletian provided for the imposition of the death penalty on persons that contrived to cause the shortage of household goods or necessities. [3] Similar penalties were imposed under the Justinian Code, as well as in the Florence State in the first century and in countries in other continents such as the United States in the seventeenth century. [4] Also, in England, laws that punished abusive restraints of trade were implemented even prior to the Norman Conquest. [5] These penalties were justified by the contention that abusive monopolies could only be prevented and economic fairness guaranteed by the intervention by the Government or public officials. In the words of Adam Smith:

A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate. [6]

The idea of Government intervention was buoyed up by some political theorists such as Hobbes, Rousseau and Weber that disparaged private enforcement. Hobbes argued that public enforcement is important because it motivates all persons to contribute towards collective goals and makes business activities more productive. He contrasted this form of enforcement with private enforcement that existed in the liberal state of nature and encouraged the furtherance of selfish interests. [7] Rousseau also argued that public enforcement is an accurate reflection of the prevailing public policy [8] and Weber posited that public officials initiate and conduct legal proceedings in a more rational manner than private individuals who are motivated by selfish interests and are not governed by bureaucratic rationality. [9]

Nonetheless, arguments supporting public enforcement have generally met with stiff opposition from many commentators and entrepreneurs who believe in the virtue of free trade. The belief in free trade was strengthened by individual successes during the industrial revolution and the cogent arguments put forward to dissolve certain abusive monopolies that were not beneficial to the society. The Industrial Monopoly Licenses introduced in 1561, for example, proved to be an instrument of abuse by persons that intended to maintain exclusive control over given trades. [10] Growing opposition from the House of Commons then pushed the Queen to decree that disaffected entrepreneurs could challenge the Monopoly Licenses in court. Thus, in Edward Darcy Esquire v Thomas Allin of London Haberdasher (also called the Monopolies Case), [11] the plaintiff who had obtained an exclusive license to control and regulate the importation and selling of playing cards in the whole of England, initiated an action against the defendant who intended to produce and sell playing cards. The Queen’s Bench held in favour of the defendant on the grounds that the plaintiff’s monopoly did not encourage manufacturing since it prevented skilled persons from practising their trade; and the plaintiff did not have any technical expertise in manufacturing cards. Nonetheless the practice of granting monopolies continued well into the eighteenth century. [12] The practice was contemporaneous with that of restraint of trade. [13] Private individuals who felt they were unduly restricted could take legal action to rescind the contracts or provisions that were in unreasonable restraint of trade. The plaintiff had to show that the contract or provisions protected the promisee to an undue degree. [14]

What is important here is that the courts recognise the right of private individuals to initiate proceedings to prevent an act that unduly restricts competition, whether such an act is based on a monopoly license, an illegal limitation or a contractual provision in unreasonable restraint of trade. The logical underpinning of this right is the contention that any act that prevents fair competition in business is ultimately detrimental to society’s welfare. In the words of Mill, “restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraint, qua restraint, is an evil.” [15]

Nonetheless, the question addressed in this essay is not whether free competition is justified, ethically and economically, but whether it is important to empower private individuals to enforce competition law in order to ensure that free competition is not restrained or monopolies are not abused. As noted above, it has been argued in some quarters that this should be the Government’s prerogative because unlike private individuals, it is most likely to achieve this result since its actions are governed by bureaucratic rationality. This has been countered by theories such as regulatory capture, which is based on the failure of the Government to protect public interests due to the influence of special interests of the biggest firms; [16] and public choice theory, whereby public officials are deemed to be self-interested agents whose actions are not governed by public welfare. [17] As such, where public enforcement cannot prevent the abuse of competition law it is only logical to rely on private enforcers. [18]

Hence, the debate on whether the prerogative of initiating proceedings against persons alleged to have perpetrated anti-competitive actions should be invested in private individuals or a public agency has dragged over the centuries and is still on-going. Private enforcement of competition law may be understood here to mean the right invested in private individuals or groups to plead with a court to grant a remedy or compensation for damage suffered due to the infringement of substantive rules of competition enshrined in the applicable statute or precedent. [19] This may be contrasted with public enforcement which involves the investment of the right to initiate (and sometimes to conduct) proceedings against the offender in a public agency or official. [20] This essay looks at the role and importance of relying on private enforcers in order to determine whether this form of enforcement may effectively provide an appropriate recourse for those that seek compensation and also deter anti-competitive practices. The hurdles encountered in the United Kingdom since the enactment of the Competition Act 1998 (CA) and the Enterprise Act 2002 (EA) will be examined, as well as the developments that have taken place within the European Union and the United States in order to determine the role that private enforcement ought to play in future.

Private Enforcement in the United Kingdom

As shown above, private individuals in the United Kingdom have been able to initiate tort claims for damages suffered as a result of abuses of monopoly licenses or agreements in restraint of trade over the years. [21] However, their role has been very limited. Competition regulation is essentially dependent on public officials as most private individuals affected by infringements of competition laws have to rely on administrative investigations or the conduct of proceedings by the public regulator. [22] Given the shortcomings of public enforcement this approach has been subjected to very harsh criticisms. [23] The CA and the EA effectively integrated private enforcers into the regulatory scheme by creating specific procedural rules that would make it easier for private individuals to enforce competition laws. The CA (s 2) prohibited activities that prevented, restricted or distorted competition and (s 18) the abuse of a dominant position. [24] The CA was then amended by the EA (s 12) which created the Competition Appeal Tribunal (CAT), a specialist judicial body that entertains claims under the CA and hears appeals of the decisions of the Office of Fair Trading (OFT) and regulators of public utility industries. The EA (Part 4) also created the Competition Commission (CC) that was charged with investigating markets. [25] Drafters of the EA were guided by propositions set out in a White Paper published by the Government for the strengthening of the role of private enforcement. [26] The White Paper noted amongst other things that private enforcement was the cornerstone of the principle of protection of individual rights under the law of the European Community. Thus, the EA provides for the replacement of the ambiguous public interest test [27] with one that ought to motivate individual action: the test of the prevention, restriction or distortion of competition. The EA also allows third parties to initiate proceedings at the CAT for damages suffered as a result of the violation of the CA or an EU rule. [28] However, such claims must be based on the OFT’s decision establishing the infringement (“follow-on actions”), else the private individuals would have to initiate proceedings at the High Court, which are referred to as “stand-alone actions.”

From the above, it may be said that apart from the right to take legal action for the tort of the breach of certain statutory duties, private enforcement of competition law in the United Kingdom is still very limited. This is because the private enforcer still relies heavily on the regulator (OFT) and judicial adjudication (CAT). This implies that the shortcomings of the enforcement by public agencies such as regulatory capture and public choice are yet to be overcome. However, private individuals may turn to the EU regime, which ideally ought to be a composite of the most effective rules of Member States. Nonetheless, since actions for the violation of competition laws are initiated in the municipal courts and not the EU Courts, the decisions of the latter have largely been persuasive.

Private Enforcement within the EU

The competency of EU Courts does not extend to hearing claims based on the infringement of competition laws initiated by private individuals. Procedural autonomy of the national courts is based on the fact that there is no applicable EU law on the matter and recourse may only be had to the remedies and rules designed by Member States. [29] Also, the Council Regulation No 01/2003 of 16 December 2002 (also known as the Modernisation Regulation) granted the municipal courts of Member States powers to hear cases under the EU anti-competition rules. However, the European Court of Justice (ECJ) may decide preliminary matters referred to it by the courts of Member States. Thus, in Courage Limited v Bernard Crehan, [30] the ECJ held that a party to an agreement restricting trade or preventing competition in accordance with the provisions of art 85(1) of the Treaty (now art 101(1) of the TFEU) is entitled to claim relief from the other party if the latter is in breach. The ECJ argued that “the practical effect of the prohibition laid down in Article 85(1) would be put at risk if it were not open to any individual to claim damages for loss caused to him by a contract or by conduct liable to restrict or distort competition.” [31]

Despite the fact that these decisions are largely persuasive and national courts of Member States still enjoy procedural autonomy, there are several cases of the violation of competition laws involving parties domiciled in different EU States. In these instances, parties may refer to the EU Council Regulation 44/2001 of 22 December 2000 (also known as the Brussels I Regulation) which is to the effect that claimants may elect to bring an action in tort in the courts of the State where the violation was perpetrated (or the event that caused the violation took place) or where the defendant is domiciled. This implies that private enforcers within the EU may choose from a broad range of jurisdictions in cases where there are many defendants. Thus, this may lead to forum shopping whereby a claimant elects to bring an action in a jurisdiction that is most likely to favour him. A good example is Provimi Ltd v Roche Products and Others [32] where the German-based claimant successfully initiated proceedings in the United Kingdom against a German-based purchaser because one of the subsidiaries of the latter was domiciled in the United Kingdom. [33] As such, the supranationalism of the EU provides a good ground for the transfer of procedural autonomy to EU Courts as regards the protection of private individuals against anti-competitive practices perpetrated in a country that is different from the one in which the plaintiff or defendant is domiciled. Since the ECJ’s decisions in Courage and Vincenzo Manfredi, the issue of the private enforcement of competition laws at the EU level has generated much discussion. [34] This led to a wide consultation process and the publication of the EU’s Green Paper and White Paper proposing substantial changes to the procedure for enforcing competition laws within the Union.

The Green Paper examined the hurdles to private actions and proposed measures to improve the stand-alone and follow-on procedures. [35] The recommendations were based on a previous research on damages claims in cases of violations of the Commission’s competition rules. [36] This was followed by a White Paper [37] that proposed “balanced measures that are rooted in European legal culture and traditions” and which require major changes of the substantial and adjectival rules of Member States. These propositions were based on an analysis of the arguments for and against private enforcement that were put forward after the publication of the Green Paper, [38] as well as the landmark decision in Vincenzo Manfredi. The Commission duly noted that although there is no specific EU law governing the private enforcement of competition law, EU Courts may still be competent given that the principle of direct effect guarantees the right of EU citizens to claim compensation for the injury suffered. Thus, they may call upon EU Courts to invalidate any contractual provision or national law that unduly restricts this right. [39]

The arguments and proposals of the White Paper have been met with strong opposition from some Member States. [40] Nonetheless, there is some degree of consensus on the fact that the legal frameworks of Member States do not provide sufficient protection to the rights of private individuals to claim compensation for damages suffered as a result of the breach of competition law. [41] Many Governments are therefore taking steps to modify their legal frameworks. In the United Kingdom, the OFT has set out a number of propositions that reflect the EU’s recommendations and declared a plan for reform of the system. [42]

Reform Inspired by the EU

The OFT was particularly concerned with the fact that private enforcement did not play the role that was recommended in its own White Paper in 2001. It therefore agreed with the EC’s White Paper that there were still unjustified obstacles. The private individuals and groups it consulted posited that this course of action was less effective in achieving compliance with competition laws. [43] Thus, out of the 202 businesses that the OFT surveyed, 45 claimed to have suffered damages as a result of the violation of competition laws but only 5 decided to initiate proceedings. [44] A majority of the entrepreneurs contended that private enforcement was not economically worthwhile. The consumers surveyed had an even bleaker outlook. [45] Hence, there has only been one action by members of a class for the violation competition law: The Consumers Association v JJB Sports plc. [46] This may be compared with statistics in the United States showing that about 90 percent of antitrust actions between 1973 and 1983 were initiated by private individuals. [47]

The Government consulted the public institutions charged with investigating and prosecuting breaches of competition laws in order to determine means of devising a consolidation mechanism that will identify and remove the obstacles to enforcement faced by both private individuals and public agencies. [48] In this regard, the OFT recommended specific actions to be taken by the Government at the domestic level that would complement enforcement at the European level. It noted that municipal courts should be required to take into consideration the infringement decisions of the EU competition authorities. Although there were concerns about the binding effect of EU decisions that were based on the elements of the legal systems of other Member States (which differed significantly from those of the United Kingdom), the OFT argued that EU decisions on cases that involved foreign parties that transacted in the United Kingdom ought to be relevant. Also, given that the Brussels I Regulation empowered claimants to choose from a variety of jurisdictions, the costs of enforcing competition laws at the EU level was much lower than the cost of re-litigating in different jurisdictions and translating the decisions of the courts of other Member States. [49] The OFT then argued that enforcement at the level of the EU will increase certainty and swiftness of action and ensure that all those that have suffered damages in different Member States are treated fairly. It pointed to s 33(4) of the German Law against Restraints of Competition that enabled parties to seek redress at the European level as a good example. [50] Finally, the OFT argued that although the claimant had to adduce evidence showing that he had suffered damages as a result of the anti-competitive act, the burden of proving ‘passing-on’ ought to lie with the defendant. The shift of the burden to the defendant may serve as a consolidation measure that would encourage private individuals to initiate actions, as well as prevent the injustice of requiring defendants to pay multiple damages caused by both direct and indirect purchasers. [51] This is a less drastic measure than that adopted in the United States where the defence of passing-on is completely excluded in cases of sales to direct purchasers. [52]

Developments in the United States have provided for a broad role for private enforcers through a number of instruments, namely class action, treble damages, contingent fees and one-way costs rule and have thus constituted an appropriate model for making comparisons of the effectiveness of private enforcement in different countries. [53]

Developments in the United States

The genesis of competition or antitrust laws in the United States may be traced to the common law doctrine of restraint of trade that enabled private individuals to take action against contracts or rules of guilds or regulatory powers that unduly restricted their business activities. [54] This doctrine also extended to the recognition of the right of private individuals to initiate tort proceedings against conspiracy if they could prove that they had suffered injury as a result of the conspiracy. [55] This doctrine and the growing ideology of classical liberalism inspired the drafting and enactment of the Act to Protect Trade and Commerce against Unlawful Restraints and Monopolies 1890 (generally known as the Sherman Act). Section 7 of this Act provided that “any person who shall be injured in his business or property…by reason of anything forbidden…by this Act may sue…and shall recover three fold the damages by him sustained, and the costs of suit, including a reasonable attorney’s fee.” Hence, the Act sought to simultaneously encourage private enforcement and deter anti-competitive actions by providing for the treble damages against violators and contingent fees. [56] The Clayton Antitrust Act 1914 was further enacted to strengthen the Sherman Act. The Clayton Act (ss 4 and 16) also empowers private enforcers to sue for treble damages or equitable or injunctive relief. Equally, it contains the one-way costs rule which favours the claimant given that the defendant has to pay the claimant’s costs in the event where the claimant wins but both parties would bear their respective costs where the claimant loses. The exclusion of the passing-on defence in cases involving sales to direct purchasers discussed above was another measure introduced to encourage private enforcement and deter anti-competitive practices.

It is uncertain whether these measures have successfully encouraged private actions and/or deterred anti-competitive practices. Research shows that there were only 175 private suits within the period of half a century following the enactment of the Sherman Act; and only 13 were successful. [57] Also, although the statistics cited above showed that private enforcers accounted for 95 percent of cases between 1973 and 1983, further studies noted that the number of private suits dropped significantly after this period. [58] It is uncertain why the number was quite high within that given decade, as well as the direct effect of the measures intended to encourage claimants and expand their role introduced by the Sherman Act, Clayton Act and the Supreme Court. Nonetheless, these measures are examples of how the role of private enforcers may be expanded. The question of whether such expansion is important depends on whether they have resulted in the compensation of private individuals that have suffered injuries and the deterrence of future anti-competitive practices.

Conclusion

This paper has examined the role and importance of private actions in the enforcement of competition laws in the United Kingdom. Private actions have generally been limited to tort claims for damages suffered as a result of the breach of competition law. Given shortcomings of public enforcement such as regulatory capture and public choice, it is important to effectively empower private individuals to ensure that individuals that suffer injuries are compensated and anti-competitive practices are deterred. Hence, the paper looked at some measures introduced in the EU and the United States to strengthen the role of private enforcers. The ECJ requires national courts of Member States to entertain claims for damages or compensation made by private individuals and the EC has published a Green Paper and a White Paper advising Member States on ways to reform their legal frameworks and provide more protection to businesses and consumers against anti-competitive practices. The EC’s recommendations have been endorsed by the OFT and it has equally made a number of specific propositions for the reform of the legal frameworks in the United Kingdom. It has notably proposed that private enforcement should be carried at the level of the EU to ensure certainty and fairness within the Union and the burden of proving passing-on as a defence should rest on the defendant.

In the United States, the Sherman Act 1890 and the Clayton Act have recognised or introduced class action, treble damages, contingent fees and the one-way costs rule and the Federal Supreme Court in Hanover Shoe & Co v United Shoe Machinery Corporation completely excluded the passing-on defence in cases of sales to direct purchasers.