BigChoc, a manufacturer of organic chocolate called Delicio |
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BigChoc, a manufacturer of organic chocolate called Delicio, won the gold medal for the purest organic chocolate at the International Food Fair for the last three years. Its European office and factory is located in Balmoral, United Kingdom (UK). BigChoc's head office is in North America. BigChoc sells Delicio in three EU Member States - the UK, Ireland and France and has approximately 60% of the market for organic chocolate in each of these countries. L'Artisan is a small French company that manufactures organic chocolate, which it also sells in the UK, Ireland and France. It has approximately 10% of the market for organic chocolate in these three countries. Marta owns a shop and café selling organic produce in the village of Balmoral where she sells BigChoc's Delicio and L'Artisan's organic chocolate. A month ago BigChoc's sales representative visited her shop and told her that she must stop selling L'Artisan's chocolate or BigChoc would not supply her anymore. Marta refused and BigChoc sent her a fax confirming that it would not supply her anymore. Marta's business has suffered as she has always sold more of BigChoc's Delicio than L’Artisan’s chocolate. Because L'Artisan is a small company it does not have the capability to supply her with as much organic chocolate as she needs. However, she has read an article on L'Artisan in the Wall Street Journal, which describes the company's plans for expansion. CandyCo a Belgian producer of organic cakes decides to make organic chocolate cakes and to sell them in six EU Member States including the UK, Ireland and France. Its market research reveals that many customers with special dietary needs, and pregnant women, choose only those organic products known for having the purest organic ingredients. However, BigChoc has refused to supply its Delicio chocolate to CandyCo and decides to make organic chocolate cakes itself. CandyCo approaches LittleChoc, another producer of fine organic chocolate, which currently sells its chocolate in Belgium and the rest of the EU but not in Ireland, France and the UK. LittleChoc also refuses to supply CandyCo, which has noticed that LittleChoc's and BigChoc's prices for organic chocolate are the same throughout the EU. On a recent holiday in Belgium Marta visits CandyCo's factory shop and learns of these events. Advise Marta on the implications of the actions of BigChoc and LittleChoc under Article 81 and Article 82 EC.
In this essay I shall discuss the implications of the actions of BigChoc and LittleChoc not only under Article 81 and Article 82 EC, but also under Chapter I and Chapter II of the Competition Act 1998. These latter provisions are based upon the respective EC Articles, but differ in their geographical scope; we may therefore find that whilst no redress for Marta can be found through application of Article 81 and Article 82 EC, such redress might be possible under the more limited scope of the Chapter I and II prohibitions of the UK’s Competition Act 1998; in this way, any advice given to Martha on the implications of the actions of BigChoc and LittleChoc would possibly be incomplete without a discussion of the prohibitions at both the EC and national level. It is for this reason I have chosen to extend the scope of my response in this way. In order for Martha to seek damages for her loss of business, she must be able to argue that she was compelled to make her decision to discontinue supply with BigChoc i.e. that the damage was not caused through her own choice to discontinue supply. She must therefore argue that had she accepted BigChoc’s stipulation to cease trading with LittleChoc, then she would have been party to an agreement which would have been in breach of EC Community and UK National Competition legislation. With this in mind, let us examine whether or not, had Martha agreed to BigChoc’s stipulations, to what extent the actions of BigChoc might be deemed to be in contravention of the prohibition provisions of Article 81 EC and Chapter I of the Competition Act 1998: Both Article 81 EC and Chapter I apply to agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition. Article 81 applies to the prevention, restriction or distortion of competition within the common market and the extent to which these undertakings affect trade between Member States. Chapter I applies to the prevention, restriction or distortion of competition within the UK and the extent to which these undertakings affect trade within the United Kingdom. Before examining the facts of the problem and attempting to identify any agreements which might, prima facie, be seen to come within the scope of either of these provisions, let us first examine the Article and Act in closer detail in order to establish a more rigorous selection criterion: Article 81(1) EC and Section 2(2) of the Competition Act 1998 provide a non-exhaustive, but illustrative list of agreements to which the provisions apply. The lists contained within each of these respective statutes are identical, and are as follows: Those agreements to which these provisions apply, are those agreements which… “(a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.” In the facts of the problem we are told that BigChoc's sales representative visited Marta’s shop and told her that she must stop selling L'Artisan's chocolate or BigChoc would not supply her anymore. Prima facie, this non-consensual ‘arrangement’ between BigChoc and Martha may be seen as affecting trade both between Member States , and within the United Kingdom , and as such, we should analyse this arrangement under both Article 81 EC and Chapter I of the Competition Act 1998. Article 81 will only be deemed applicable where the undertaking in question ‘may have caused an appreciable effect on interstate trade’; this phrase has been interpreted broadly by the case law of the European Courts, and as such prima facie we can be confident that such an affect would be deemed to have been created by the imposition of BigChoc’s ultimatum. Chapter I will only be applicable where the agreement is, or is intended to be implemented in the UK ; there is no doubt that BigChoc’s proposed agreement was intended to be implemented in the UK, and as such, prima facie, we can remain confident at this stage that Chapter I of the Competition Act 1988 will also be applicable to this undertaking. A note should be made here in relation to the actual term ‘undertaking’, as used both by myself above, and also in the wording of the respective EC and National Law provisions: In the case of Hofner and Elser v Macrotron [1991] , the meaning of ‘undertaking’ was held to cover ‘any natural or legal person engaged in economic activity, regardless of its legal status and the way in which it is financed’. This definition provides no problems in our pursuit of a claim against BigChoc under the Article 81 or Chapter I prohibitions. As for whether this arrangement is one which might be seen to sufficiently cause the prevention, restriction or distortion of competition within the common market/UK market, it should be noted that the arrangement is very similar to the example stipulated in part (e) of the list of agreements to which the provisions apply ; in essence, BigChoc were renegotiating Martha’s supply contract of Delicio chocolate. BigChoc stated that the contract would not be concluded unless Martha agreed to accept a supplementary obligation not to trade with BigChoc’s rival L’Artisan; there is no doubt here that this obligation is one which, ‘by its nature or according to commercial usage, has no connection with the subject of the contract,’ which is the supply of BigChoc’s merchandise, and nothing to do with L’Artisan in any way whatsoever. The OFT will only reach the decision that BigChoc has infringed Article 81 EC and Chapter I of the Competition Act 1998 if there is “strong and compelling evidence” to that effect. This was the broad test outlined in the case of NAPP Pharmaceutical Holdings Limited and Subsidiaries v Director General of Fair Trading [2002] . The Commission’s Notice on Agreements of Minor Importance states what is not to be considered ‘an appreciable restriction of competition under Article 81 EC’. Agreements between parties [undertakings] which affect trade as between Member States are not be consider being ‘an appreciable restriction of competition under Article 81 EC’, where… “the aggregate market share of the parties to the agreement does not exceed 10 per cent on any of the relevant markets affected by the agreement where the agreement is made between competing undertakings (i.e. undertakings which are actual or potential competitors on any of the markets concerned), or the market share of each of the parties to the agreement does not exceed 15 per cent on any of the relevant markets affected by the agreement where the agreement is made between non-competing undertakings, (i.e. undertakings which are neither actual nor potential competitors on any of the markets concerned).” This is not any easy ‘guideline’ to apply; we know that BigChoc are a party to the agreement, but their trade is not being adversely affected by the agreement. LittleChoc are not as such a direct party to the agreement, but in light of the fact that it is them would suffer a loss through the arrangement between BigChoc and Martha, it would seem crucial that any test whose aim is to ascertain whether or not the affect of the agreement is an ‘appreciable restriction’, would focus not on the market share owned by BigChoc, but rather that of the victim company LittleChoc. After all, if the important feature of this assessment is the share of the market held by the larger company, then this guideline would in effect be giving the go-ahead for any larger company to simply put small competitors [those with a market share lower than 10%] out of business. LittleChoc’s share in the UK only 10%, and therefore not ‘greater than 10%’ as required, but the actual percentage of the ‘relevant markets affected’ is much lower than this, as in effect it is only LittleChoc’s business in Martha’s store which will be adversely affected by this agreement. It therefore seems likely that LittleChoc are too small a company to result in the agreement in question being deemed in contravention of Article 81 EC or Chapter I of the Competition Act 1998. We are told however that LittleChoc are planning an expansion, and if this does go ahead, then perhaps this point should be revisited in light of its new market position, and resulting increased affected share. There is also a high chance that if BigChoc are attempting to impose such conditions on Martha’s shop, then they are also imposing this condition on other retail outlets who are selling LittleChoc’s wares. If this was the case, then LittleChoc could take an action out against BigChoc for their breach of EC and UK Competition law, and at least such an action might not fall down at this hurdle. It should be noted however that even if LittleChoc’s aggregate market share which is affected by BigChoc’s conduct was calculated to be above 10%, this would not necessarily mean that the OFT would hold that the effect on competition is appreciable . Other relevant factors must be taken into account in this determination, such as the content of the agreement and the structure of the market or markets affected by the agreement, such as entry conditions or the characteristics of the buyers and the structure of the buyer’s side of the market . It is important to note that none of the exceptions provided for by Article 81(3) EC and s9(1) of the Competition Act 1998 are really relevant to our agreement in this question. Let us now address the issue of Article 82 EC and Chapter II of the Competition Act 1998, and establish whether BigChoc’s conduct could be deemed a breach of either of these provisions: Article 82 EC and Chapter 2 of the Competition Act 1998 are provisions designed to prohibit one company abusing its dominant market position. Again the Chapter II provision is based upon the EC Article, the primary difference being in the geographical scope of their protection : Article 82 EC provides that: 'Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.' The Chapter II prohibition provides that: '…any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.' Let us apply these provisions to the situation in our problem question, and see if BigChoc’s forced stipulation that Martha ceases trading with LittleChoc could be held to be an abuse of BigChoc’s dominant market position. The two fundamental stages of the test are as follows: Firstly we must establish that BigChoc is dominant in the relevant market. Then we must argue and establish that BigChoc is in abuse of that dominant position . In order to establish this, the Office of Fair Trading will conduct a detailed examination of the market concerned and the effects of BigChoc’s conduct within that market. Let us now conduct an examination of our own, based on the facts provided in the problem question, and ascertain the likelihood of BigChoc being found to be in breach of Article 82 EC and Chapter II of the Competition Act 1998: There is no doubt that BigChoc are in a dominant position relative to LittleChoc, with a 60% UK market compared to a 10% one. As for whether the conduct of BigChoc is sufficiently abusive to constitute abuse under these provisions, it should be noted for purposes of guidance, that both Article 82 EC and Chapter II of the Competition Act 1998 provide a list of conduct which may constitute abuse. This list is merely illustrative, i.e. not exhaustive, but it gives us some idea of how to apply these provisions : (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of the contracts. The arrangement is very similar to the example stipulated in part (d) of the list of conduct to which the provisions apply; in essence, BigChoc were renegotiating Martha’s supply contract of Delicio chocolate. BigChoc stated that the contract would not be concluded unless Martha agreed to accept a supplementary obligation not to trade with BigChoc’s rival L’Artisan; there is no doubt here that this obligation is one which, ‘by its nature or according to commercial usage, has no connection with the subject of the contract,’ which is the supply of BigChoc’s merchandise, and nothing to do with the restriction of selling L’Artisan in any way whatsoever. Whether or not BigChoc can seek limited immunity on the basis that, as per s40 of the Act, the annual turnover of the company does not exceed £50 million is unknown from the facts. This immunity however is not available under Article 82 EC, and in light of the fact that this conduct would almost certainly, under the wide interpretations offered by the Community Courts, be deemed incompatible with the common market [in this case, affecting trade between Member States France and the UK], we can be quite confident that such conduct by BigChoc would be held to be in contravention of Article 82 EC. The consequences of this infringement would in this case most probably be in the form of a financial penalty. When setting the amount of any penalty, the OFT must have regard to its ‘Guidance as to the appropriate amount of a penalty. ’ The penalty imposed may be of up to 10% of the worldwide turnover of BigChoc, bust as expressed above, the final decision is up to the OFT, who are, as a result of the Modernisation Regulation, in charge of such assessments . As for Marta; she may apply to the courts as a third party and seek damages for her loss of business and also perhaps to seek an order forcing BigChoc to resume her supply, although it is more likely that the OFT would award only damages . We are now faced with a perplexing series of facts; CandyCo a Belgian producer of organic cakes decides to make organic chocolate cakes and to sell them in six EU Member States including the UK, Ireland and France. Its market research reveals that many customers with special dietary needs, and pregnant women, choose only those organic products known for having the purest organic ingredients. However, BigChoc has refused to supply its Delicio chocolate to CandyCo and decides to make organic chocolate cakes itself. CandyCo approaches LittleChoc, another producer of fine organic chocolate, which currently sells its chocolate in Belgium and the rest of the EU but not in Ireland, France and the UK. LittleChoc also refuses to supply CandyCo, which has noticed that LittleChoc's and BigChoc's prices for organic chocolate are the same throughout the EU. This information, coupled with the fact that we are also told that there was published an article on L'Artisan in the Wall Street Journal, which describes the company's plans for expansion, might lead us to believe that BigChoc and LittleChoc have in someway made an agreement to fix their prices. At the time of the BigChoc approaching Marta however, from the facts, we can be pretty certain that such an agreement had not yet occurred, and as such these later facts do not have a bearing on the conclusions reached so far in this essay. However, in light if these initial facts, we might speculate that BigChoc had commenced a wide-spread attack on its smaller rival LittleChoc; through approaching stores such as Marta’s and giving the owners of these stores the same ultimatum, either cease purchasing from LittleChoc or we will cease supplying you with BigChoc. Of course, some stores, like Marta’s, would refuse to panda to this demand, but it is almost certain that the larger stores in the market would realise the importance of maintaining supply from the dominant manufacturer, especially in light of the fact that BigChoc had won awards for the excellence of its product for the past three years. If this was the case, eventually BigChoc could have been in a position to force LittleChoc into a price-fixing agreement, in return for removal of these nationwide supply restrictions The above is of course a speculation, but it is one which, from the facts supplied to us, seems a plausible one. Let us assume that such price fixing agreement has in fact been made between BigChoc and LittleChoc, and assess its implications under Article 81 and 82 EC and Chapter I and Chapter II, respectively: Having made this assessment, I will conclude by briefly addressing the same factual situation as if LittleChoc had been forced into this agreement by BigChoc’s abuse of its dominant market position, as per my above speculation. “An agreement whose object is directly or indirectly to fix prices, or the resale prices of any product or service, almost invariably infringes Article81 and/or the Chapter I prohibition. ” The reason for this ‘hard-core restriction’ that an agreement or arrangement which fixes prices between competitors does, by its very nature, restrict competition to an ‘appreciable’ extent; the prices are no longer subject to the natural market forces of healthy and free competition. The various ways in which such agreements may purport to restrict prices can include the actual fixing of a price or the percentage by which prices are to be increased, or less directly setting a minimum price [lower than which such prices must not fall] or establishing an agreed price range, outside of which the prices must not be set . In our case, the prices of BigChoc’s and LittleChoc’s products are identical in value throughout Europe. This suggests that if a price fixing agreement has been reached between these two rivals, then it is of the kind which stipulates the exact prices by which the products will be sold. In light of such an agreement, the OFT would impose financial penalties upon the two companies in the order of 10% of their total worldwide turnover. This is a maximum penalty, and of course the OFT have discretion available to them to take into account all the relevant circumstances and will set a penalty tariff with regard to its ‘Guidance as to the appropriate amount of a penalty. ’. BigChoc and LittleChoc could attempt to evade such penalty by arguing that their agreement falls within one of the legal exceptions introduced by the Modernisation Regulation . In summary, the legal exception regime introduced by this recent regulation means that even if the agreement in question fully satisfies the stipulations of Article 81(1), and is as such, prima facie, a competitive restriction which should be prohibited, the agreement can still be capable of being deemed valid and enforceable, as long as, and for as long as, the conditions set out in Article 83(3) EC are satisfied. The burden of proving that these aforesaid conditions are met would lie on BigChoc and LittleChoc, the undertakings claiming the benefit of Article 83(1) EC . The Competition Act 1998 was amended to be in accordance with this legal exception regime, and the conditions of exception can be found within s9(1) of the Act. As with Article 81(3) EC, where an agreement comes within the stipulations of Article 81(1), and is as such, prima facie, a competitive restriction which should be prohibited, the agreement can still be capable of being deemed valid and enforceable, as long as, and for as long as, the conditions set out in s9(1) of the Competition Act are satisfied. The burden of proving that these aforesaid conditions are met would likewise lie on BigChoc and LittleChoc, the undertakings claiming the benefit of s9(1) in our case. The conditions in Article 81(3) and section 9(1) are virtually identical . There are four conditions which must all be satisfied in order for BigChoc’s and LittleChoc’s price fixing agreement to be validated and upheld: Article 81(3) EC/s9(1) of the Act provide that Article 81(1)/s9(1) is inapplicable in respect of any agreement: 'which contributes to improving the production or distribution [of goods] or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.' As stated above, the burden of proof would be upon BigChoc and LittleChoc to formulate an argument for why their agreement does indeed satisfy the four provisions above. The could argue that they have fixed their prices so that they cannot go above a certain maximum, and in doing so have contributed to the distribution of goods [in that more people can now afford the products] but at the same time have allowed the consumers a fair share of the resulting benefit [i.e. lower prices]. They would have to argue that such an agreement was necessary and indispensable to achieving the objective of greater distribution, and that their agreement does not serve to eliminate other rival competitors who are not party to the agreement. Whether or not BigChoc and Little Choc are successful will depend upon the actual nature of the agreement, and how well they can argue the above points based upon the actual situation of the market and the contents of the agreement made, but if they are successful, then their agreement will be deemed valid. If they are unsuccessful, then their agreement will be deemed void , and as previously stated, financial penalties may be imposed if the breach of Article 81 and/or Chapter I is shown to have been committed intentionally or negligently . BigChoc and LittleChoc should also be aware that no ‘small business arrangement’ immunity is available for price-fixing agreements such as the kind in question here . If CandyCo believes that the reason that both companies rejected their request for the supply of chocolate is due to some other agreement between them, then they may apply to the OFT for an investigation into this matter. From the facts, it seems that the reason BigChoc declined the order was due to the fact that BigChoc were themselves interested in making the cakes which CandyCo were planning to manufacture, and as such did not want to help out their competition. No such reason has been provided for LittleChoc’s reasons for rejection, and as such we can assume that they rejected for different reasons. In this way, from the facts provided, it does not seem likely that an agreement as to who to supply their goods to had been made between LittleChoc and BigChoc. As a final point: If LittleChoc had been forced into this agreement by the conduct of BigChoc, then they may avoid the financial penalties imposed by the OFT in regards to this price-fixing agreement, should such penalties in fact be ordered. A simple argument of the kind employed earlier in this essay, using the provisions of Article 82 EC and Chapter II of the Competition Act 1998, to show that BigChoc had abused its 60% dominant market position to force LittleChoc into a position where the only economically viable option was to meet the demands of BigChoc and commit to a price-fixing agreement, would be sufficient to evade liability; damages may even be awarded for LittleChoc’s loss of business as a result of BigChoc’s abusive conduct. LittleChoc could rely upon the testimony of shop owners such as Marta to evidence BigChoc’s anti-competitive conduct.
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