Jonathan DC Turner
|The need for an effective competition policy|
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This is a copy of an article published in the European Intellectual Property Review, December 1984. Copyright is reserved by the author and moral rights have been asserted. The article may be copied and distributed provided this done free of charge and in relation in the whole article, including details of authorship and this notice, without any amendments.
Possibly the most damaging judicial decision for the welfare of the British people during this century was that in Mogul Steamship v McGregor Gow (1891)/1. The facts were stated succinctly by Lord Halsbury as follows:
The methods of the defendants included predatory pricing, rebates for exclusive dealing, and refusing to appoint agents who also acted for competitors not belonging to the cartel.
The plaintiff brought an action for damages suffered by reason of the defendants' conduct, but the House of Lords held that no such action would lie. They laid down, in the widest possible terms, the proposition that, although agreements in restraint of trade might be unenforceable because they were contrary to public policy, they were not tortious, unless the predominant motive of the participants was not to advance their own interests but to injure the plaintiff.
There were suggestions in the speeches that public policy was a matter for the legislature, but no legislation was introduced to stop this lacuna of the common law. This was in sharp contrast to the United States, where the sweeping provisions of the Sherman Act were passed in 1890.
Attitudes in the ruling circles in the UK had not always been so relaxed about restraints of trade. In the Case of Monopolies (1602)/2 Popham C.J. declared:
And the Statute of Monopolies 1624 gave a remedy of triple damages and double legal costs to any person aggrieved by an unlawful monopoly. Perhaps at the end of a century which had seen the construction of four main railway lines from London to Manchester it was felt that there was a surfeit of competition. But the following half-century saw an enormous reduction in competition in the British economy. Restrictive practices became particularly widespread between the World Wars in the 'sunrise' industries of the time, such as electricals and chemicals./3 It has been estimated that by 1958, 50 to 60 per cent of UK manufacturing output was subject to cartel regulation./4 Although such agreements were often promoted by the inter-war Governments, it is now generally recognised that they increased the length and severity of the recession, and contributed to the relative decline of the British economy. In concrete terms, they increased the misery of unemployment and reduced Britain's capacity to re-arm against Hitler./6
The Labour Government of 1945 -1951 set out to remedy the problem of private monopolies and cartels in two ways. First, the commanding heights of the economy were nationalised. However, this did not solve the problem, because it simply transformed private monopolies into public ones. Indeed, it aggravated the problem, in so far as private cartels were fused into total public monopolies. Second, the Labour Government introduced the Monopolies and Restrictive Practices (Inquiry and Control) Act 1948. However, a major weakness of this legislation was that no risks were taken by persons operating monopolies or engaging in restrictive practices contrary to the public interest, unless and until an order was made following an inquiry. Moreover, an aggrieved person could not bring proceedings except for contraventions of such an order; the inquiry and control was to be done by bureaucrats.
The competition policies of successive Governments followed this pattern. Further nationalisation was carried out mainly by Labour Governments, while the monopolies and restrictive practices legislation was developed by both Conservative and Labour Governments. However, although the scope of the latter was extended to cover services as well as goods, numerous limitations and exceptions crept in, no doubt as a result of successful lobbying by different vested interests.
The sanctions for restrictive practices remained weak. No criminal liability was imposed (except for making false statements) unless and until the various inquiries were completed, resulting in an adverse order of the Restrictive Practices Court. Potentially the most beneficial development was the conferment by the Restrictive Trade Practices Act 1968 of a civil right of action on persons aggrieved by the continued operation of the restrictive practices if they were not registered as required. However, this remedy has been surprisingly little used. Perhaps this reflects the extent of the limitations and exclusions. Perhaps it reflects the restrictive practice whereby lawyers have not until recently been permitted to advertise their services, in casu so as to inform persons aggrieved by restrictive practices that a lawyer may be able to assist. Perhaps it reflects the fact that many restrictive practices were registered, thereby exonerating the parties from any liability unless and until they were investigated.
The present Government has in its rhetoric placed the promotion of competition at the very top of its priorities. On the public ownership front it is carrying out an extensive programme of privatisation. However, the implementation of this programme again suffers from the defect that a change from private monopoly to public monopoly or vice versa does not in itself increase competition; a fact which has been highlighted recently in connection with air transport and telecommunications. On the other front, the Competition Act 1980 extends the scope of earlier legislation, but relies on four layers of bureaucracy to achieve its objective of maintaining competition. Again, unless and until an order is made, which can only be after a succession of inquiries, persons operating monopolies or restrictive practices contrary to the public interest incur no liabilities. There is every incentive for such persons to procrastinate, by which time the troublesome complainant entrepreneur may have gone away.
The effectiveness or otherwise of British competition legislation since the Second World War is a controversial question. Certainly, resale price maintenance and many of the rigid cartels created in the inter-war period have been by and large abolished by the legislation. However, it can be argued that a great deal more remains to be done. With the sanctions being so weak, it is reasonable to infer that many restrictive practices continue, this being in the interest of the participants. The onus lies on those who support the present system to show that it is working effectively, an onus which they have conspicuously failed to discharge./7 The inference that more should be done in the United Kingdom is further supported by the comparison with the United States and Germany, whose dynamic economies are policed by strong competition laws, which impose automatic sanctions generally on unjustified anti-competitive practices.
A further consequence of the lack of a general and reasonably stringent competition law in Britain is that the role of the intellectual property system of rewarding and encouraging innovation is undermined. Insidious proposals are contained in the recent Green Paper on 'Intellectual Property Rights and Innovation'/8 and are discussed by Hugh Brett at  4 EIPR 114. The report correctly diagnoses 'ineffectiveness' in the remedies for anti-competitive activities in the field of intellectual property. However, it prescribes a more draconian approach to compulsory licensing as a means of improving the bargaining power of potential licensees - a remedy about as specific and relevant as leeches.
Where there is effective competition, inventions which are worth exploiting will, save in very exceptional cases, be exploited, because the profits to be made by so doing are much greater than those available by making known products using known processes. One of the most notorious alleged cases of abuse of the patent system by failure to exploit was in relation to long-life electric light bulbs. However, if any worthwhile inventions were not exploited (which has never been proved'), this would have been due to the existence of the worldwide 'Phoebus' cartel, pursuant to which the world's manufacturers of light bulbs shared out the world's markets and agreed inter alia that the standard life of bulbs should be 1,000 hours./10 Thus the mischief did not lie in the patent systems but in the unrestrained operation of a cartel.
On the other hand, compulsory licensing does not prevent the use in intellectual property licences of seriously anti-competitive provisions - such as grant-backs/11 to name one example, which has probably had a particularly damaging effect on British industry by preserving the early technical lead established by German and American businesses in chemicals and electricals. The theory that improving the bargaining power of licensees will improve competition is misconceived, because the most serious effect of these anti-competitive provisions is not to reduce the profits of the licensee, but to foreclose competition by third parties.
Save in very exceptional cases, inventors and designers should get a market reward for their innovations. Compulsory licensing generally involves a cost-plus approach, which assesses the value of the invention on the basis of effort (as estimated by accountants) rather than results. It is an interference with the price mechanism, which is the key feature of a market economy, ensuring the most efficient allocation of resources between competing activities. The free market system should be upheld by (1) permitting the owners of intellectual property freedom to exploit their rights to the full; and (2) giving competitors effective remedies against, and imposing immediate liabilities on, those who engage in anti-competitive activities which go beyond simply exploiting or not exploiting intellectual property rights.
At present, those in the UK who are aggrieved by abuses of monopoly or restrictive practices are compelled to look abroad for relief, either to the European Communities or to the USA. The European Commission and Court have recently sharpened their teeth: Pioneer Europe and its distributors were fined over £2 million/12 and AEG- Telefunken over £S 00,000./13 However , it appears that an aggrieved person may have difficulty in forcing the European Commission to act, if it has defined its position as not intervening unless further information comes to light./14 An action can be brought in British courts for infringements of Articles 85 and 86, but the inappropriateness of the adversarial system and a lack of experience in arbitering questions of economic policy on the part of the judges may be obstacles, particularly in relation to the requirements of an appreciable effect on competition and on trade between Member States. A further important limitation is that the sensitive sectors of air and sea transport are not yet included in the jurisdiction of the Commission/15 although Articles 85 and 86 may well be directly applicable in national courts notwithstanding./16
The US legislation is more comprehensive and provides more opportunity for aggrieved persons to challenge abuses of monopoly and restrictive practices. In particular , an aggrieved person can bring an action for triple damages in respect of loss incurred by reason of any restraint of, or attempt to monopolise, commerce between the several states or with foreign nations. yet the present Government, avowedly dedicated to promoting free competition, has treated the operation of this US legislation as an invasion of British sovereignty. The Protection of Trading Interests Act 1980 is a deliberate attempt to nobble the due process of US anti-trust law whenever the Secretary of State pleases. The Court of Appeal sought to aid and abet such an attempt recently, saying that in the field of foreign policy the courts and the executive should not speak with different voices./17 Having been partially rebuffed by the House of Lords/18 Government ministers have tried to solve the matter diplomatically, with some 'success'./19 No doubt they now hope that the doctrine of the separation of powers will be approached by the American courts in a similarly nuanced manner to that adopted by Sir John Donaldson M.R.
The British Government should treat the US anti-trust law as an ally, not as an ogre with dishonourable intentions. In the interest of military defence under NATO, the present Government and its predecessors have permitted, and indeed encouraged, the stationing of American troops and weapons on British territory. Why then is the application of American anti-trust law to restrictive practices, which affect trade with the US, treated with such hostility?
The concept that monopolies and restrictive practices may and usually do operate against the public interest is a British invention, which has been more exploited abroad than at home. It is high time this changed. The Government should introduce legislation whereby all unjustified anti-competitive practices are unconditionally prohibited, subjected to unlimited fines, and treated as breaches of statutory duty entitling third parties to compensation for any damage suffered as a result of their adoption. The term 'anti-competitive practices' is adequately defined in section 2(1) of the Competition Act l980. Difficulties which may arise in deciding whether such practices are 'unjustified' could be substantially mitigated by providing that regard should be had to decisions taken in the application of corresponding provisions of US and European Communities law. No single measure would more effectively implement the present Government's declared policy of promoting competition.
1  AC l.
2 Noy 173, Moore KB 671, 1 WPC 1, 11 Co.Rep. 846.
3 See generally the Reports of the Monopolies and Restrictive Practices Commission into various sectors of the economy; Aldcroft, The Inter- War Economy: Britain 1919-39, Batsford, 1970, at 140 et seq.; Pollard, The Development of the British Economy 1914-1980, Edward Arnold 1983, at 58 to 66 and 102 to 107; A Review of Restrictive Trade Practices Policy, 1979, Cmnd 7512.
4 A Review of Restrictive Trade Practices Policy, op. cit., paragraph 3.7.
5 See the 1979 Green Paper (Note 4 above}, Chapter 3.
6 For a provocative, right-wing account of the international consequences of British economic decline up to 1941, see Corelli Barnett, The Collapse of British Power, Eyre Methuen, 1972.
7 The 1979 Green Paper voiced misgivings, but expressed the view that a change to the American or German systems of automatic prohibition would cause too much upheaval; paragraphs 3.23 to 3.26 and 7.8.
8 Cmnd 9117,1983, paragraphs 5.11 to 5.22.
9 See the Swan Committee, Second Interim Report, 1946, Cmnd 6789, paragraph 24.
10 Monopolies and Restrictive Practices Commission, Report on the Supply of Electric Lamps, 1950-1 Parliamentary Papers, paragraphs 65 to 89 and 123 to 133.
11 See National Broach & Machine Co. v Churchill Gear Machines Ltd [ 19671 RPC 99. Presumably the UK restrictive trade practices legislation could not be relied upon because the American licensor did not carry on 'business within the United Kingdom in the production or supply of goods, or in the application to goods of any process of manufacture' (1956 Act, section 6). With hindsight it might have been worth arguing on behalf of the British company that the grant-back was void by being a common law restraint of trade or prohibited by US antitrust. The result would almost certainly be different today under EEC law.
12 Cases 100-103/80 Musique Diffusion Francaise v Commission [19831 3 CMLR 221.
13 Case 107/82 AEG-Telefunken v Commission [19841 3 CMLR 325.
14 Case 26/76 Metro v Commission [19771 ECR 1875; Case 125/78 GEMA v Commission [19791 ECR 3173; Case 191/82 FEDIOL v Commission [198413 CMLR 244.
15 Regulation 141 (1962) OJ 2751.
16 Case 13/61 de Geus v Bosch [ 19621
ECR 45; Case 48/72 Brasserie de Haecht v Wilkin-Janssen [19731 ECR 77; Case 167/73 Commission v France (French Merchant Seamen) [ 1974] ECR 359.
17 British Airways Board v Laker Airways  Q B 142, 193.
18  3 WLR413.
19 The decision of the US Justice Department not to proceed with the federal claims against the airlines: see The Times, 21 November 1984. The liquidator's action is continuing.