Competition law in a commercial context

1. Competition law in a commercial context Dr. Paul Hughes 4th October 2013

2. Personal backgound • English solicitor and academic, with over 20 years experience of EU and UK competition law • I became involved in competition law through commercial law • What I am not – a Sri Lankan attorney!

3. What is competition law? • Competition law is a mandatory and pervasive regulatory environment relevant to Sri Lankan exporters, irrespective of contractual choice of law • It is a regulatory interference in markets in order to ensure that the latter function effectively, thereby generating pro-consumer efficiencies • Interference occurs where anti-competitive agreements, monopoly power or mergers threaten to diminish rivalry in a harmful way • Non-compliance creates tortious liability and, in some regimes, criminal liability • What it is not – the common law restraint of trade doctrine

4. Which states/supranational bodies have competition law? • Over 110 countries have effective competition law regimes, many of which are modelled on EU competition law, e.g. • UK Competition Act 1998 and Enterprise Act 2002; • Indian Competition Act of 2002; and • the Competition Act of 2004 of Singapore all of which regulate anti-competitive agreements, any abuse of a dominant position and mergers. • They are commonly effects-based prohibitory regimes

5. Which states/supranational bodies have competition law? • The Peoples Republic of China has a competition law regime which is intended to: • advance consumer interests; and • promote economic efficiency and which allows the government to protect its economic interests, for instance through subjecting foreign acquisitions of Chinese corporations to regulatory scrutiny. • The authorities are currently using the prohibition of resale price maintenance to drive down the baby milk prices charged by foreign companies

6. Which states/supranational bodies have competition law? • There are also comprehensive competition laws and competition authorities in place in: • Indonesia, • Thailand • Vietnam; and • Malaysia • Brunei Darussalam, Cambodia, Lao PDR and Myanmar intend to introduce competition law.

7. Which states/supranational bodies have competition law? • ASEAN Member States have committed (within an ASEAN Economic Community Blueprint) to introduce national competition policy and law by 2015  • Why? • To ensure a level playing field and a culture of fair business competition; and • So as to enhance regional economic performance and attract inward investment • Sri Lankan Sunday Times 29 September 2013: • “…many Asian countries…have propelled their economic growth with FDI. Why has Sri Lanka failed to attract FDI?” • Need to adopt policies conducive to Foreign Direct Investment

8. Competition law principles and its sector-specific application • Competition law at its most complex can require sophisticated economic analysis, however, it can be reduced to some basic principles which are evident in nearly all the regimes in operation globally • Its importance has also been recognised in sectors such as banking, telecoms and energy, where it is either embedded in or, in the case of the United Kingdom banking sector, due to be embedded within the sector-specific regulatory system and where it should play an important role in ensuring rivalry drives down prices

9. What is the commercial context in which competition law can become relevant? • Lawful commercial strategies: • Attempting to acquire new technology or expanding into new product markets • Seeking to expand into new geographic markets • Wanting to form collaborative joint ventures or to merge with other enterprises in order to create economies of scale or scope

10. What is the commercial context in which competition law can become relevant? • Unlawful commercial strategies: • Entering into ‘vertical agreements’ that have as their object or effect the reduction of competition e.g. in the EU • the conferral of absolute territorial protection or imposition of resale price maintenance; or • the conclusion of agreements that have the effect of foreclosing markets, for instance where one of the parties has market power and the scope of the contractual restraints is excessive

11. What is the commercial context in which competition law can become relevant? • Unlawful commercial strategies: • Engaging in cartels which are designed to increase prices, reduce output, allocate markets/customers or rig bids; or • Using monopoly power to foreclose markets, e.g. employing predatory pricing designed to oust rivals or deter entry or exploiting that power (perhaps in the form of excessive prices)

12. What is the commercial context in which competition law can become relevant? • Unlawful acquisition strategies: • acquiring decisive influence over another undertaking • in a manner that will create: a ‘significant impediment to effective competition’ in the EU (or a substantial lessening of competition in the US - other tests may be applicable in states where US or EU merger control rules do not apply)

13. Agreements and concerted practices between and decisions by associations of Undertakings Which may affect trade between member states Having as their object or effect The prevention restriction or distortion of competition in EU Any agreement combination or concerted action Which unreasonably restrains trade; and Has an effect on inter-state commerce or foreign commerce Article 101(1) TFEU and Section 1 Sherman Act 1890

14. 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 insofar as it may affect trade between member states… Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony . . . Article 102 TFEU and Section 2 Sherman Act 1890

15. Article 101(2) TFEU – nullity sanction; the relevant restrictions will be void (the whole agreement may fall away – ‘blue pencil test’) Regulation 1/2003 – fines of 10% group global turnover N.B. even minority equity participations may expose the ‘parent’ company to joint and several liability for the subsidiary’s fines Courage Ltd v Crehan – civil action and damages; breach of EU or UK competition law is a statutory tort; Articles 101 and 102 TFEU are ‘directly effective’ Sections 1 & 2 Sherman Act -violations unlawful and a criminal felony Individuals and corporations can face fines Individuals can be sentenced to up to ten years in prison for cartel activity Civil actions - treble damages (90% of antitrust enforcement in the US is through civil action) Sanctions

16. The effects-based approach • Both US antitrust and EU competition law apply an effects-based approach • EU: • Days Medical Aids Ltd v Pihsiang Machinery [2004] EWHC 44 (Comm): exclusive distribution agreement of Korean mobility scooters in UK potentially unenforceable due to length of exclusivity – restraint of trade doctrine required to give way to EU competition law • Exclusive sale obligation by Alrosa in favour of de Beers in respect of Russian raw cut diamonds to be imported into EU potentially void under Article 102: Case C‑441/07 P Commission v Alrosa Company Ltd • Gencor/Lonrho: mergers of two South African mining companies with sales of platinum and rhodium in EU in breach of EU merger rules and transaction incapable of consummation, even though lawful in South Africa; in Case T-102/96 Gencor v Commission the General court of the EU confirmed that it was compatible with public international law to apply EU merger rules to a south african merger, in view of the foreseeable, immediate and substantial effect of the concentration in the EU • Cartels: DRAMS, LCDs and Intel Air Cargo (exporting non-EU companies fined) • Virtually all EU Commission cases are generated by leniency applicants seeking exoneration from fines. • The EU Commission's cartel fines in in 2010 totalled €2.9 billion and in 2011 €614 million

17. Criminalisation of competition law in the EU • EU competition law – no criminal sanctions • UK – 5 years imprisonment and unlimited fine; cartel profits are proceeds of crime subject to disgorgement • France – 4 years in jail and a fine of up to €75,000 • Other countries are criminalising • UK, Sweden and Finland have laws that allow directors of non-compliant companies to be banned from acting as directors

18. US – recent enforcement • US Department of Justice typically has around 50 cases open at any one time • No ‘pure US’ cartels – both EU and US regulators aggressively pursue component suppliers, even where cartelist input into goods or services sold into the EU or US is relatively small (Asia manufactures for the world) • In 2009-2010 in three cartel cases 13 companies were subject to fines in excess of US$10 million each • US$1.2 billion aggregate fines were imposed on the thirteen companies, ranging from US$15.7 million (El Al Airlines – air cargo) to US$400 million (LG Display) • Executives faced average jail sentences of 23 months in 2009 (18 months on average for non-US citizens) • More than half of DoJ cases rely on leniency and ‘whistleblowing’ • Civil action settlements: LCD case US$1.1 billion in total of which Samsung paid US$82.67 million and LG US$75 million

19. The impact of leniency programmes “Once the toothpaste is out of the tube, it's hard to get it back in.” Bob Haldeman, White House Chief of Staff and Watergate co-conspirator

20. … and it is a slippery slope “...I think that where it sort of got deeper in the end is that we all knew each other’s prices and customers exactly. It was a sharing of information and I think that, from that, we just didn’t fight each other any more...” BemroseBooth Limited Sales Director being interviewed by the UK Office of Fair Trading as part of its investigation of price fixing and market sharing in the stock check pad market - 31st March 2006.

21. How does this affect Sri Lanka? • Agreements and mergers may be unenforceable in the states in which they are due to be implemented if they violate local competition law – total failure of consideration? • Companies (and their parent/holding companies) may be liable to regulatory fines and tortious civil action, with possible enforcement of judgments in Sri Lanka • Executives in Sri Lanka may pick up ‘bad habits’ through lack of familiarity with competition law and pay for it heavily, if they export to markets in a manner that violates local competition law • Cartel profits may be ‘proceeds of crime’

22. Is Sri Lanka missing out by not having competition law? • Efficiency: • Monopoly market power impairs incentives to reduce firm costs: Liebenstein (1996) • Competitive pressure impacts on firm efficiency and growth rates: Blundell et al (1995); Nickell (1996) • New entrants to a market can generate higher productivity: Caves (1998)

23. Is Sri Lanka missing out by not having competition law? • ASEAN countries anticipate greater competitiveness and inward investment though the introduction of competition law • Fines are high and getting higher – of benefit to the EU/national treasury • Driving down excessive prices charged by cartelists and monopolists is societally beneficial • It is possible to adopt a system that avoids the worst excesses of US antitrust civil litigation • Business executives would become familiar with a regime that has proliferated globally and could catch them out if they are unaware of the pitfalls • A domestic regime would generate greater awareness of competition law and thus of the opportunities it can offer to Sri Lankan businesses seeking to break into foreign foreclosed markets

24. Conclusions Whatever regulatory path Sri Lanka follows, given the proliferation of competition law regimes worldwide, its exporters still face a pressing need to keep the toothpaste in the tube!