In Apple’s business model, it calls itself an agent and gets a commission on the sale price. In genuine agency situations, the supplier is free to tell the agent what price to sell at. However, if it is not a genuine agency situation, this is forbidden. The EU rules as to what amounts to a genuine agency are complex. They include looking at who bears the financial risk or commercial risk in the sale of the books.

The Commission will now investigate. If found guilty, the parties to anti-competitive arrangements can be fined up to 10% of their turnover, the agreements are unenforceable and third parties can sue for damages.

The European Court of Justice has backed up the French Competition Board’s decision. The ECJ looked specifically at the question of selective distribution networks. It said that establishing those networks are not prohibited by Article 101 if resellers are chosen based on objective criteria, where those criteria are applied uniformly and non-discriminately, where the characteristics of the products need to preserve the quality and ensure proper use, and the criteria only go as far as is necessary. However, provisions within those networks may still end up offending against competition law. The ECJ has not accepted arguments relating to the need to provide individual advice to customers and to ensure their protection against incorrect use of products in the context of non-prescription based products to justify an Internet sales ban. Contract provisions that effectively prohibited Internet sales meant that the benefit of the block exemption did not apply. That said, it would still be for the national court to ascertain whether the contract had an individual exemption, as the failure of an agreement to fall within block exemption parameters does not automatically mean that it will not be found to be individually exempt on other criteria.

Now, the OFT has published a report evaluating the impact of its 2001 decision. It has concluded that, as a result of its intervention, the prices in the hospital sector have risen so that other people can compete, Napp’s market share has dropped significantly, and prices in the community sector have come down (and by far more than the OFT had required in its decision). This has therefore been a significant success for boosting fair competition.

The High Court said that Guna was in breach of the agreement and should have transferred the registrations. It struck out Guna’s competition law defence. For that defence to work, it should have produced detailed evidence. Instead, the evidence was only general and sketchy. These were complex issues and the arguments needed to be fully made out and argued with good supporting evidence. It may have been that Nelsons’ market share was very high and that its actions were not permitted in the circumstances, but this was not clear from the evidence presented. As the defence was uncertain, what was left was that Guna was in breach of contract.

The Office of Fair Trading (OFT) launched an investigation in January 2005 into allegations of collusion between producers of dairy products and supermarkets in relation to retail pricing. In September 2007 the OFT informed a number of businesses, including Tesco, Sainsbury, Asda, Morrisons and Safeway (which was bought by Morrisons in 2004), that the OFT had found evidence of their involvement in collusion that infringed Chapter I of the Competition Act 1998. Chapter I of the Competition Act 1998 prohibits an agreement, decision or concerted practice between undertakings which may affect trade in the UK (or part of the UK) and has as its object or effect the restriction, prevention or distortion of competition within the UK.

The OFT reached early resolution agreements with many of those accused, under which those businesses admitted that they had been involved in collusion, accepted liability and any fine imposed by the OFT, and agreed to assist the OFT in the continued investigation. Under the early resolution agreement, Safeway agreed to pay a fine of more than £10 million, which had been reduced from £16 million under the terms of the agreement.

A number of companies within the Safeway ‘group’ filed proceedings in order to recover damages from former directors and other former employees, and hoped to obtain an indemnity against the costs of the OFT investigation and fine. Safeway argued that those former employees had breached their contracts of employment, had breached fiduciary duties they owed to Safeway, and had been negligent.

The defendants applied to the court for a summary judgment or to have the claim struck out on the grounds that, firstly, the claim went against the principle of ‘ex turpi causa – that a claimant cannot pursue an action if it arises in connection with the claimant’s own wrongdoing, and a court will not assist a claimant seeking to recover a benefit from that wrongdoing – and, secondly, that the claim went against the Competition Act 1998 and accompanying competition regime.

The High Court ruled that the case should proceed to trial on the grounds that Safeway had a real prospect of defeating any defence brought by the defendants based on the ‘ex turpi causa’ principle as Safeway’s liability was arguably not personal, primary or direct, and it was possible that the defendants had been the ‘directing mind and will’ of Safeway at the time of the breach. The High Court also ruled that moving the fine from Safeway to the former employees at fault was consistent with the competition law regime under the Competition Act 1998. The High Court therefore ruled that the case should proceed to trial for a more thorough consideration of the facts. The defendants appealed the ruling.

The Court of Appeal ruled in December 2010 that the appeal should be allowed, and that the defendants were entitled to summary judgment such that Safeway’s claims were struck out. In a unanimous verdict, the Court of Appeal ruled that the ‘ex turpi causa’ principle did apply, such that Safeway could not recover the amount of the fine due to the OFT from its former employees alleged to be at fault for the breach of competition law. The Court of Appeal ruled that Safeway’s liability was personal and could not be passed to its employees, and that the aim of the Competition Act 1998 is to protect consumers, and the general public, from distorting trade practices, which would be undermined if a company could then pass on any liability to individual employees.

The High Court had arguably put directors at risk of huge financial liabilities if their companies infringed competition law. However, the ruling of the Court of Appeal ensured that directors are no longer at personal risk under competition law, and clearly states that the competition law regime imposed by the Competition Act 1998 places liability on companies themselves, and that such liability must remain personal to those companies and not passed on to employees past or present, even if those employees were at fault for the infringement.

The full text of the ruling can be found here.

The first is aimed specifically at SMEs (small and medium sized enterprises) setting out step-by-step guides to stay in line with competition law. The second is aimed at directors of all companies, outlining the level of knowledge and understanding directors need to have of competition law.

With businesses liable to be fined up to 10% of their turnover and with directors at risk of disqualification should their companies breach competition law, the guidance is likely to be welcomed.

A link to the two sets of guidance can be found here:  http://www.oft.gov.uk/OFTwork/consultations/current/achieving-compliance/  and   http://www.oft.gov.uk/OFTwork/consultations/current/company-directors/.

The OFT has the power to fine organisations up to 10% of their turnover for having an anti-competitive agreement contrary to the Chapter I Prohibition of the Competition Act. Third parties who suffer loss arising out of anti-competitive conduct can also sue for damages. In addition, individuals involved with cartel activity can be personally fined and jailed under the Enterprise Act.

R tendered alone for a possible contract, and C clubbed together with another supplier. C went into liquidation and its rights were taken by J. R won the tender. J claimed that R had breached the prohibitions in its agreement with C and that if it had been unable to do what it did, then it would have had to bid with C (now J) and they could have won the bid together. R claimed that the prohibition was an unenforceable restraint of trade and breached Article 101 of the Treaty on the Functioning of the European Union (formerly Article 81 of the EC Treaty).

The High Court ruled that the restriction was unenforceable under EU competition law and granted R summary judgment on the issue. The wide scope of the restrictions and the people affected as well as what was covered by C’s ‘confidential information’ meant that if R had information relating to C or its business practices, finances, dealings and clients received from C, it would breach the contract if any group company made contact with C’s existing or prospective clients. It was very wide in time and unlimited in geography. It went further than could reasonably be required to protect C’s confidential information. This breached Article 101, as it amounted to an agreement that had the object or effect of distorting competition and which could affect trade between Member States of the EU. Since the parties were not operating at a different level of supply – as C was not purchasing or supplying to R but merely assisting clients with obtaining supplies – a possible block exemption for vertical agreements under Article 101(3) did not apply to exempt the arrangement.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of Upload-IT, comments: ‘This case should act as a warning to commercial entities that want to agree non-compete provisions. If they are too wide in scope, they could infringe EU competition law. That in turn could entail large fines, unenforceable agreements and third parties suing for damages.’

This latest criminal trial against the four individuals has collapsed after the discovery of a lot of emails. The OFT, which brought the prosecution, has so far not explained why it dropped the case. However, the defence team claims that the emails showed that the executives had not colluded with Virgin and made the case untenable.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of www.Upload-IT.com, comments: ‘We await details of the reasons for the collapse of the case. In the lead up to the trial, the executives have suffered unexpected turbulence to their careers and they will now hope to draw a line under the episode. The OFT is keen to make examples of people who engage in anti-competitive practices. They did not succeed this time, but businesspeople should be careful not to do anything that could put themselves in the firing line. Entering into discussions with any competitors or acting in a co-ordinated way with competitors is a dangerous game and could have serious unwanted effects for the future of the business and individuals concerned.’

• Agreement as to the actual or minimum resale price.
• Restrictions on the territories or customers to whom the buyer may sell, subject to certain exemptions such as an exclusive territory reserved to the supplier or another distributor.
• Restrictions on members of a selective distribution system from selling to end users.
• An prohibition on the buyer not to supply competing goods if that prohibition is indefinite or more than five years.

The Commission’s Guidelines, which need to be read alongside the new Regulation, contain particular points around use of the Internet. Receiving orders on a web site is generally considered to be passive selling, and passive selling cannot be restricted. This is also the case where a customer opts in to be automatically informed about developments and this leads to a sale. It is unacceptable to have a provision that prohibits a distributor from preventing customers in another territory from viewing its web site or automatically re-routing those customers to another distributor. However, a web site can have a link to another distributor’s site. Likewise, you cannot terminate a customer’s Internet transaction once it is clear from credit card data which shows an address not within the distributor’s own territory.

A further web development is that a distributor cannot be required to have a limit on the amount of Internet sales as a proportion of its overall sales. However, one new development which appeals to operators of selective distribution networks is that the supplier can require the buyer to sell a certain absolute amount (in value or volume) off-line in a bricks and mortar shop. The supplier can also require the buyer’s web site to be consistent with the supplier’s overall brand.

The Guidelines also consider the extent to which Internet advertising would be active or passive selling. Banner advertising or advertising on third party web sites addressed to certain customers is active selling, as is paying search engine service providers or other online ads where (in each case) the advertising is directed to users in a particular territory.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of www.Upload-IT.com, comments: ‘It’s good news in terms of certainty that the previous rules have been largely replicated. One interesting change of emphasis is on Internet selling. The European Commission is keen to promote and enhance trade between Member States and the latest rules try to prohibit restrictions on distributors from using the Internet to obtain what are seen as ‘passive sales’ from customers in other countries.

It is important for businesses to conform with competition law, because I have often had to advise clients against use of terms that they do not realise infringe competition law. Failure to comply with the law in this area could have serious implications: fines of up to 10% of global turnover, an unenforceable agreement, and the right for third parties to sue for damages.’