Competition Law - Samuel Beighton - ThinkHouse March 2016

Michael Luckman: Competition law continues to be an old ThinkHouse favourite and in this session we will be looking at two elements in particular, e-commerce and the new UK cartel offence. Samuel Beighton, a specialist in competition law gives us the low down.

I'm used to, in European terms, talking about the single market in relation to goods and services but of course I understand now we're looking at a digital single market, but I've also heard about this commission enquiry. Can you tell me about this e-commerce enquiry?

Samuel Beighton: Yeah sure, the e-commerce sector enquiry what it really stems from is the Commission has the power where it has concerns regarding distortion of competition to actually launch a sector enquiry. What that means is it can take into account factors such as pricing rigidity, level of trade between EU member states. It doesn't need the full evidence required to launch an investigation into a company but where it has concerns about levels of competition it can launch a sector enquiry.

That's exactly what it's done in terms of e-commerce and the reason for that underlying sector enquiry is with e-commerce what we see is just an explosion of the use of the internet. Now consumers now buy online so frequently there was a recent report that was issued by the Commission which said actually now one in two consumers in the EU are buying goods and services online. However, what we are finding is that only 15%25 of those consumers are purchasing outside of their own member states which suggests there is some reason behind that. Now that may be cultural reasons what the Commission really wants to get into is are there underlying reasons that perhaps companies have created whereby there is a restriction upon cross-border e-commerce and that is really what the e-commerce sector enquiry is looking to establish.

Michael: I understand there's something significant about the timing of the enquiry as well, is that right?

Samuel: Yeah very much so. The timing of the enquiry really links with the launch by the Commission of the digital single market strategy and what the digital single market strategy seeks to do is to really open up the digital space within Europe.

So where for physical goods and services the idea of a single European market is very very well established within the digital space the concern is there currently are 28 separate member states which have their own markets and the idea of the digital single market strategy is to really break down those barriers between member states so you open up a truly cross-border EU wide market for digital goods and services. In terms of the sector enquiry that ties in because the Commission is then seeking to use competition law as a tool to achieve that outcome so as to ensure you have a robust and competitive digital single market across the entirety of Europe.

Michael: And has the Commission identified any key competition concerns at this stage?

Samuel: Well at this stage the Commission is wading through thousands of responses from companies in relation to the questionnaires that the Commission has been issuing on this. However at the time of the launch of the e-commerce sector enquiry the Commission did identify two quite large concerns it had.

The first in relation to the so called geo blocking. Geo blocking occurs where, for example, a company has a distributor in another member state so perhaps I've been on holiday to Italy, I've seen some lovely shirts in Rome, I arrive back into Birmingham or to London and I go on the internet to try and buy from that distributor in Rome, what I find is I'm routed back to the UK distributor so I'm unable to actually make that purchase. I can't make that connection via the internet to that Italian store. So that's an example of geo blocking.

Oother concerns in relation to pricing restrictions and that is you know a perennial bugbear of competition authorities in resale price maintenance keeping prices at a certain level and using those to restrict competition. So the sector enquiry at the moment is very much squarely focusing upon distribution arrangements and the sorts of restrictions agreed between suppliers and distributors and how those may affect e-commerce.

Michael: So with the Commission doing the driving in this regard does that mean that the national competition authorities are taking a bit of a backseat on all this?

Samuel: No, sadly not. What we're seeing is that national competition authorities have always tended to take enforcement action against the sorts of restrictions between distributors and suppliers that the Commission is currently looking at. So we still have national competition authorities very much undertaking their own cases and looking to apply both national and EU law as it currently stands.

For example we have seen in Germany, the German competition authority has recently concluded a case into the asics distribution system and what the authority held there was in terms of e-commerce the authority identified restrictions imposed upon distributors from using asics key words for online advertising. They also found that asics had prevented certain distributors from using price comparison websites again for selling via the internet and what the German competition authority held as a conclusion to its investigation was that these sorts of restrictions actually, they do infringe competition law, they do infringe article 101 of the treatment and function of the European Union.

We've also seen a settlement with Adidas, Adidas settled with the German competition authority there were concerns raised about certain clauses in its distribution system. Those have been amended by the company. The French competition authority has also recently concluded an investigation into Adidas working closely with the German competition authority in that respect and in the UK we have a current investigation by the Competition and Markets Authority into concerns regarding internet advertising prices.

So the idea is that manufacturers prevent distributors advertising online below a certain price. That is an area which regions have retail price maintenance concerns about maintaining pricing levels internet restrictions, so again, we'll wait and see what happens in terms of the context of that investigation.

Michael: So what does all this mean for companies?

Samuel: Well for companies I think it means they need to tread very very carefully because at the moment e-commerce is squarely under the spotlight in terms of competition law compliance. So that means if companies are looking to impose restrictions upon distributors they need to think very carefully about what those mean in practice. So what we see in terms of competition law is it's very much a case of substance rather than form.

We have recent case law whereby a company which is a defacto ban on selling online by virtue of a requirement to have a pharmacist present at all times. You know that doesn't say you can't sell on the internet but what that clause means by its operation is that a distributor cannot sell on the internet and that's been confirmed by the Court of Justice in those circumstances to be an object restriction over article 101. Those sorts of restrictions are the sorts of restrictions where it's very easy for a competition authority to craft a case on an object restriction and therefore the compliance risk is much higher for a company.

So while it might be quite tempting to seek to have, you know, a quick fix to perhaps ban a distributor from selling online or banning them from advertising certain prices online, these are things that need to be considered very very carefully and I hope the real question is, can you achieve that outcome you're seeking via a different means. So can you actually use the existing legal framework, can you work within that to get to where you'd like to be? Rather than trying to shortcut it and giving rise to a whole range of compliance risks by doing so.

Michael: So what can we expect next in relation to e-commerce and EU competition law?

Samuel: So I think next for e-commerce we have the sector enquiry that will be wrapping up. We had a recent speech Margrethe Vestager the Commissioner for Competition, she indicated that the Commission was seeking to put out before Easter a position paper on geo blocking so that'll be one to read with interest.

We then have the final report of the sector enquiry expected first quarter of 2017 and I think given how important this is in terms of priority for the Commission we are likely to see those timescales to be in respect insofar as they can be. So we have the sector enquiry, we also have the possibility of infringement decisions coming out of that. We've seen in previous sector enquiries, for example in Farmer we saw three infringement cases brought following that we may well see the same at both the European Commission level but also don't forget national competition authorities are active in this space as well. So it'll be interesting to see the extent to which those develop and I think potentially expand upon the sorts of restrictions which will be caught by competition law in that e-commerce sector.

Michael: Away from Europe from a bit, I understand there's been some quite scary stuff coming out of the UK in relation to criminal enforcement.

Samuel: Very much so. I mean back in 2003 we saw the introduction of the criminal cartel offence in the UK and the criminal cartel offence is very much intended to operate to complement the existing civil regime and what the criminal cartel offence does is it places individuals liability at the centre of compliance. So if an individual is found guilty on indictment of the criminal cartel offence they will face up to five years in prison and/or an unlimited fine. So this is a very very serious sanction which faces individuals in terms of their activities in the UK.

However, what we've seen to date is a somewhat limited success record by the Office of Fair Trading and its predecessor, the Competition and Markets Authority. What we saw summer just gone was, a trial before Southwark Crown Court of two individuals accused of engaging in a criminal cartel offence. That trial was a three week trial and focused primarily upon the issue of dishonesty. The reason for that was because, under what I will call the old criminal cartel offence, what had to be proven by the prosecution was whether there was dishonesty in terms of the arrangements that were entered into between these competitors and the arrangements we're thinking about here are you know, the very worst of the worst, in terms of competition or infringements, so we're thinking you know, bid rigging, market sharing, price fixing between competitors.

But a key component of that was proving to the criminal standard this question of dishonesty. Was the defendant dishonest in their conduct? That has proven very difficult, after three weeks the jury found the two individuals to be not guilty, proving not possible for the prosecution to actually establish dishonesty in those circumstances.

So what we now have as of 1 April 2014 of a new criminal cartel offence and this new offence is brought in purposely to make it easier to bring prosecutions and the way that works is dishonesty is no longer required to be proven under the new cartel offence. So dishonesty goes out of the picture and instead it's to the defence to advance certain limited defences and exclusions in relation to that offence, so the burden is much more heavily upon the defence to evidence that actually this is either capable of exclusion or its capable of being defended it's no longer for the prosecution to overcome this, you know, quite substantial hurdle proving dishonesty in those cases.

Michael: So it's now much more likely then that people involved in anti-competitive behaviour could go to prison?

Samuel: I think that is very very much the case. We have seen recently the Competition and Markets Authority has been issuing a number of statements saying that they are actively looking to prosecute cartel offences in the UK. They have invested in terms of their cartel enforcement structure, they have people on board for example, digital forensics so they are you know very much tooled up to go after these cases. They have the expertise on board to go after these cases. It is a priority for them to go after these types of cases. We also heard in the trial I mentioned in the Southwark Crown Court the sentencing Judge said this is the sort of case whereby if individuals are found guilty of this offence it's so serious that they should be expecting prison sentences.

Michael: And the evidential burden on the side of the prosecuting authorities as well by the sounds of it.

Samuel: The evidential burden being on the authorities who actually bring that case in the first instance but then it being upon the defendants to actually evidence that you know with dishonesty no longer needed to be proven by a prosecution that they are capable of defending this themselves so they can advance the defence or prove an exclusion applies to their conduct.

Michael: So if you were an in-house counsel what would you be flagging to your senior management in your organisation then?

Samuel: I think in this current climate more so than ever with you know ever growing fines being imposed upon companies and now also a new cartel offence in the UK which is purposely designed to make it easier to bring prosecutions, this needs to be front and centre before boards so they are aware of this and they can ensure they have appropriate compliance measures in place.

In addition to the cartel offence I've kind of focused on that mainly, but, there is also the possibility of director's disqualification. So director disqualification for up to 15 years as well as if an individual is found guilty under the criminal cartel offence it is possible for individual's assets to be seized under the Proceeds of Crime Act.

So these are really serious sanctions against individuals with an enforcement regime that's very much ramping up to make individual liability the flavour of the day so I think, if I was a general counsel I would definitely make sure this is going to the board and it's a top down approach to compliance.

Michael: Some very good advice there Sam, thank you very much indeed.

Samuel: Thank you.