Jonathan DC Turner

Barrister 

The UK Competition Act 1998 and Private Rights

Three Stone Chambers

3 Stone Buildings

Lincoln's Inn 

London WC2A 3XL, UK

Tel: +44 (0)20 7242 4937

mail@jonathanturner.com

This is a copy of an article published in the European Intellectual Property Review, April 1999. It is not guaranteed to be up-to-date when downloaded. 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.

In 1984 the author wrote an article in this Journal[2] entitled “The need for an effective competition policy”.  That article argued that the lack of an effective competition law was a principal cause of Britain’s relative economic decline in the course of this century.  It concluded:

“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. .... 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.”

The article also pointed out that an effective competition policy was entirely consistent with strong protection of intellectual property rights promoting innovation and quality; and that inadequate appreciation and exploitation of intellectual property resulted from ineffective control of anti-competitive practices.  In the absence of competitive pressure intellectual property rights lose their proper function of enabling undertakings to obtain a competitive advantage from innovation and quality.

Following that article the author prepared a draft Bill. With the assistance of Hugh Brett[3], the article and draft Bill were brought to the attention of leading figures of the main political parties. A Green Paper of 1988[4] accepted the case for radical reform and the principle of harmonisation with EC competition law[5]. However, as a result of political considerations, legislation was postponed until the recent return of decisive government. 

The main provisions of the Competition Act 1998

The Competition Act 1998 contains many features which were in the author’s draft Bill.  Essentially it brings UK competition law into line with the EC model which has now been adopted in a number of other member states.  A provision in similar terms to Article 85 of the Treaty of Rome (called the “Chapter I prohibition”) prohibits agreements and concerted practices which prevent restrict or distort competition in the UK, unless they are exempted on UK grounds equivalent to Article 85(3) or are exempted from Article 85 under Article 85(3)[6].  A provision in similar terms to Article 86 (called the “Chapter II prohibition”) prohibits abuses of dominant positions within the United Kingdom[7]. 

In both cases, the requirement of an effect on trade within the UK is substituted in the Act for that of an effect on trade between member states of the EC[8].  In the case of the Chapter I prohibition there is also a requirement that the agreement, decision or practice is, or is intended to be, implemented in the UK, analogous to the criterion for EC jurisdiction identified by the European Court in the Wood Pulp case[9]. 

A key clause[10] provides that in determining questions arising under this legislation, courts and tribunals

“must act (so far as compatible with the provisions of this Part …) with a view to securing that there is no inconsistency between (a) the principles applied and the decision reached by the court in determining that question; and (b) the principles laid down by the Treaty [of Rome] and the European Court, and any relevant decision of that Court, as applicable at that time in determining any corresponding question arising in Community law” and

“must, in addition, have regard to any relevant decision or statement of the [EC] Commission”.

Most of the existing UK competition law (apart from the control of mergers and acquisitions and general investigations of oligopolies) is repealed, including sections 44 and 45 of the Patents Act 1997 on tying and automatic extension provisions in patent licences and contracts for the supply of patented articles[11].

In short, the Competition Act extends prohibitions equivalent to articles 85 and 86 to situations in the UK where EC law does not apply because there is no or insufficient effect on trade between the UK and other member states.  This extension is important not only because it covers many situations not previously covered by articles 85 and 86, but also because it provides greater authority and proximity of enforcement.  This article will concentrate on the implications for private rights, but to put these in context, it is desirable first to survey the main provisions of the Act.

Exceptions

The Act applies to most types of commercial conduct and most sectors of the economy. However, mergers and concentrations are excluded from Chapters I and II and remain subject to control under the Fair Trading Act 1973[12].  More regrettably, professional rules of a wide range of professions (including lawyers) will be excluded from the Chapter I prohibition unless Ministers decide otherwise following a recommendation of the Office of Fair Trading (OFT)[13]. 

There is also a provision enabling the Secretary of State to modify the legislation in relation to “vertical agreements” or “land agreements”[14].  Definitions of these terms are not provided in the Bill but are to be prescribed by Order[15].  This will apparently enable any modification to be aligned with any measure which may be adopted by the EC following the European Commission’s review of vertical restrictions[16].  The term “vertical agreements” may refer generally to agreements between companies at different stages of commerce, but the Commission’s Green Paper on vertical restraints focused more specifically on agreements for the supply of goods for resale, and its recent White Paper covers vertical agreements for the supply of goods for resale or processing or for the marketing of services[17]. Modification of the UK Act will not be required if the EC proceeds by revision of the block exemptions, since the revised block exemptions will apply automatically under Chapter I.  However, the power to modify the UK Act could be used if the Commission adopts a Notice setting out Community policy in relation to vertical agreements. 

It is not clear whether the power to modify the Act in relation to “land agreements” will only be used in relation to agreements for the supply of goods for resale, such as tied house and petrol station agreements, or whether it will be used in relation to leases generally.  If the latter, it could be relevant to the exploitation of intellectual property in distribution franchising. 

Enforcement

The OFT has extensive powers of policy development, investigation and decision similar to those of the EC Commission.  It will propose block exemptions for adoption by the Secretary of State[18] and grant individual exemptions under the equivalent to Article 85(3)[19].  It will be able to carry out investigations where there are reasonable grounds for suspecting contraventions[20].  In doing so, it may require the production of documents[21] and (in certain circumstances) enter premises without warrant and without advance warning[22]. 

If the OFT concludes that the prohibitions are contravened, it may impose fines[23] and make orders to bring the infringement to an end[24].  The OFT may also make interim orders to protect the public interest or prevent serious irreperable damage to particular persons pending the completion of an investigation[25].

Agreements and conduct may be notified to the OFT for guidance[26] or a decision[27] as to compatibility with the Act.  Notification confers immunity from penalties for breach of the Chapter I prohibition (but not Chapter II) until the guidance or decision is given[28].  If the guidance or decision is favourable, no further action is to be taken by the OFT unless (a) the OFT has reason to believe that there has been a material change of circumstances, or (b) the OFT has reason to suspect that materially incomplete or misleading information was supplied, or (c) guidance only has been given and a party to an agreement applies for a decision under Chapter I or a third party makes a complaint under Chapter I or II[29].  No fine may be imposed after favourable guidance has been given unless the OFT gives notice removing the immunity, and the notice may only be backdated if it reasonably suspects that the party provided materially incomplete or misleading information[30].

There is also provision for immunity from fines for “small agreements”[31] and abuses of dominant position of “minor significance” [32].  However, these are not expressly excluded from the Chapter I and II prohibitions.  Whether they are excluded by importation of the “de minimis” doctrine of EC competition law[33] in accordance with the EC interpretation clause[34] is discussed below.

Decisions of the OFT can be appealed to an appeal tribunal of the Competition Commission[35] (which replaces the Monopolies and Mergers Commission[36]), and from there on a point of law to the Court of Appeal[37].  It seems that decisions of the OFT and the Competition Commission can also be challenged by judicial review[38].

In relation to regulated utilities the OFT shares its powers with the industry regulators[39].

The issues relating to private rights

Although the Bill contains these elaborate provisions for enforcement by public authorities, it does not specify what effect the prohibitions have on private rights.  The only express provision is section 2(4), the equivalent of article 85(2) of the Treaty of Rome, which simply provides that agreements prohibited under Chapter I are void.  Provisions of earlier legislation governing private rights, including sections 44 and 45 of the Patents Act 1997, are repealed[40].

Various issues will have to be resolved on the basis of the EC interpretation clause and general principle, including the following:

(a)    How void are agreements prohibited by Chapter I?  Does the invalidity affect provisions which do not restrict competition or which would be exempted?  Does it affect transfers of property by, or pursuant to, agreements prohibited by Chapter I?

(b)   Is conduct prohibited by Chapter II also void?

(c)    Can a person claim damages in respect of a breach of Chapter I or II?  Does it make any difference if the claimant was party to the breach?

(d)   Can a person claim an injunction restraining breach of Chapter I or II?  If so, in what circumstances?

(e)    Can conduct prohibited by Chapter I or II affect the enforcement of proprietary rights?  If so, in what circumstances?

Effect of the EC Interpretation Clause

Before considering these issues specifically, it is necessary to look more closely at the effect of the EC interpretation clause.  Although on the face of it, the concept seems clear enough, there are some difficulties in transposing the principles of EC Competition law into the different context of the UK Act.

The European Court has indeed held in Polydor v Harlequin[41] and its Opinion on the EEA Agreement[42] that provisions on free trade and competition in similar terms have different meanings depending on their context.  According to these cases, in the context of the Treaty of Rome these provisions are interpreted in the light of that Treaty’s objectives of achieving economic integration between the member states leading to the establishment of a single internal market and economic and monetary union; its creation of a customs union; its establishment of a new legal order taking precedence over national laws; and the powers which it confers on the Community to achieve the uniform application of Community law and the abolition of disparities between the national laws of member states.  In this context, a principle of exhaustion of intellectual property rights is incorporated into the interpretation of provisions on free trade and competition[43]. Where these factors are absent, the principle of exhaustion is not necessarily incorporated[44].

On the other hand, one of the reasons for the European Court holding that articles 85 and 86 cannot be interpreted so as to deprive the owner of intellectual property of the essence or substance of the right is that article 222 of the Treaty of Rome provides that “This Treaty shall in no way prejudice the rules in Member States governing the system of property ownership”[45].  It could be argued that a different conclusion could be reached in a context where article 222 does not apply.

Is there a form of renvoi?

Accordingly, a first question to consider is whether the incorporation of EC law by the EC interpretation clause of the UK Act also incorporates the concept that principles applicable to provisions of the Treaty of Rome on free trade and competition do not necessarily apply to rules in similar terms outside the context of the rest of the Treaty of Rome.

The EC interpretation clause of the Competition Act states that

“The purpose of this section is to ensure that so far as is possible (having regard to any relevant differences between the provisions concerned), questions arising under this Part in relation to competition within the United Kingdom are dealt with in a manner which is consistent with the treatment of corresponding questions arising in Community law in relation to competition within the Community.”

It would seem to follow from this that, the interpretation of provisions in similar terms should reach a similar same result, even though the context is different.  On this basis, principles applicable to the Community rules on competition by virtue of their context in the Treaty of Rome, such as protection of the specific subject-matter and exhaustion of intellectual property rights, should be applied under the UK Act, despite the difference in context. 

On the other hand, where EC law provides that it is for national courts to determine matters, such as the effects of infringements of articles 85 and 86 on private rights, it is submitted that a form of renvoi should operate.  In accordance with the requirement of consistency, the UK courts must apply the same principles of UK law in the application of the UK Act as they would in applying articles 85 and 86.

Scope of intellectual property rights

This leads to a second question: should the application of the UK Competition Act take into account the scope of rights under UK intellectual property laws, or should it be based solely on the treatment of intellectual property rights under EC competition law?

This issue is complicated by the fact that the principles of EC law in this area are themselves far from clear[46]. However, it appears that where restrictions accepted by or imposed on an undertaking fall within the “specific subject matter” of intellectual property rights, they do not normally infringe articles 85 or 86 of the Treaty of Rome, or at any rate this is a factor to be taken into account in assessing whether they infringe these provisions. 

Thus in relation to article 85, the criterion appears to be whether the agreement prevents restricts or distorts competition by comparison with the competition which would otherwise exist, having regard to the possible enforcement of the “specific subject-matter” of intellectual property rights[47].  In relation to article 86, it appears that the enforcement of the “specific subject-matter” of an intellectual property right cannot be itself an abuse but can offend article 86 if it is an instrument of an abuse[48].

The “specific subject-matter” recognised by the European Court may be limited by reference to the applicable national law.  For example, in the Windsurfing case, the assessment of the agreements was based on the fact that the German patent protected only the novel rig and not the board[49].  However, the “specific subject-matter” is not necessarily the same as the scope of the national law protecting the intellectual property right; indeed, if it were the same, the European Court would not have had to develop the concept.  The “specific subject-matter” is determined by the European court by reference to the “essential function” of the right[50] and incorporates a principle of Community-wide exhaustion[51], at any rate to the extent that the intellectual property is exploited by the sale of articles[52]. 

By contrast, under UK intellectual property law free circulation depends on the concepts of implied licence and non-derogation from grant, except in areas where UK law has been harmonised to conform to EC legislation[53].  On this basis, an owner of an intellectual property right cannot normally restrict the subsequent resale, repair or use of an article which it has sold, but can do so if the original sale was subject to a specific condition and that condition has been brought to the notice of subsequent purchasers[54].

Should the assessment of a restriction, for example as to the class of persons to whom a patented product may be resold within the UK[55], take into account the fact that, under UK patent law, the patent could be enforced against a person who has notice of the resale restriction?  It could be argued that the principle of EC competition law is that a restriction is permitted under articles 85 and 86 if it is within the scope of an intellectual property right as adjusted by the free trade provisions of the Treaty; and that this principle permits a restriction on resale within the scope of an intellectual property right within a member state. 

Despite the logic of this argument, it is submitted that for the application of the UK Act to be consistent with EC competition law, as required by the EC interpretation clause, principles such as exhaustion of rights have to be recognised in the application of the UK competition law in relation to trade within the UK, whatever the position under UK intellectual property law.

Meaning of consistency

A third question is whether the requirement of consistency laid down by the EC interpretation clause of the UK Act means (a) that the principles applied under the UK Act should be the same as those developed under EC competition law, or (b) that the principles applied under the UK Act should not conflict with those developed under EC law, or (c) merely that the determination of an individual case under the Act should be consistent with any determination of that case under EC competition law. 

The importance of this question is increased by the fact that the European Court of Justice may lack jurisdiction to determine questions arising out of disputes as to the interpretation of the Act unless it has to be the same as EC law.  The European Court has held that it has jurisdiction under article 177 of the Treaty of Rome to answer a question referred by a national court where the dispute concerns the meaning of a national provision intended to have the same meaning as a corresponding provision of Community law[56], but not where it concerns the meaning of a national law which is merely similar to a provision of Community law[57].

It seems that the EC interpretation clause is intended to go beyond possibility (c), consistent treatment of individual cases, since it refers to “the principles applied, and decision reached”. A literal interpretation might support possibility (b), that the principles should not conflict, since the clause requires “consistent” treatment rather than the “same” treatment.  However, it is submitted that legal principles can only be fully consistent if they are the same, i.e. possibility (a). If they are not the same, they lead to different conclusions in at least some cases.  Furthermore, the application of complementary (but not identical) principles under the UK Act would be contrary to the aims of obtaining greater certainty and simplified compliance by the incorporation of principles of EC law[58].

Effect on trade and the requirement of appreciable effects

A fourth question is how the EC interpretation clause applies where the wording of the UK Act is similar but not identical to that of the Treaty of Rome. The most significant example is the requirement that the agreement or conduct “may affect trade within the United Kingdom”. The corresponding requirement in the Treaty of Rome is that the agreement or conduct “may affect trade between member states”.  That requirement has been interpreted by the European Court on the following basis:

“This provision, clarified by the introductory clause of Article 85 which applies to agreements in so far as they are 'incompatible with the Common Market,' aims to fix the field of application of the prohibition by the requirement of a prior condition consisting in the possibility of hindering the realisation of a single market among the member-States.”[59]

Another formulation, frequently reiterated by the European Court with minor variations, is that the agreement or conduct must be

“capable of endangering, directly or indirectly, actually or potentially, freedom of trade between member-States in a way which could harm the attainment of the objectives of a single market between the member-States.”[60]

The European Court has also observed on many occasions that the purpose of the requirement is “to define, in the context of the law governing competition, the boundary between the areas respectively covered by Community law and the law of the member-States”[61].

It is difficult to see how this concept can be sensibly applied to the requirement under the UK Act that the agreement or conduct “may affect trade within the United Kingdom”.  Moreover, section 60 of the UK Act (the EC interpretation clause) itself contains the qualifications “having regard to any relevant differences between the provisions concerned” and “so far as is compatible with the provisions of this Part”.  It might seem that in relation to this concept, EC law should be disregarded.

If so, it is necessary to determine how the requirement that the agreement or conduct “may affect trade within the United Kingdom” should be interpreted in accordance with UK principles.  Sections 2(7) and 18(3) specify that for these purposes “the United Kingdom” means “the United Kingdom or any part of it”, and there is no express requirement that the effect must be “appreciable” or “substantial”[62].  It seems likely that effects which are insignificant or “de minimis” in the normal meaning of that phrase should be ignored, but it may be more difficult to argue on the basis of a purely UK approach that the effect on trade must meet some higher threshold of being “appreciable” or “liable to jeopardise the objectives of a single market in the UK”.

This begs the question whether agreements whose effects are not appreciable even in the context of the UK market will escape the UK Act. The corresponding principle of EC competition law is closely linked in the case-law of the European Court with the requirement of an effect on trade between member states[63].  It is not clear whether it can be derived independently from the requirement that the agreement has as its “object or effect the prevention restriction or distortion of competition within the common market” and hence imported into UK law via the equivalent phrase in the UK Act. Moreover, the European Court has sometimes held that “object” and “effect” are alternatives, so that if an agreement has as its object to prevent restrict or distort competition, it is not necessary to establish that it has had that effect[64], let alone that it has had that effect to an appreciable extent.

This difficulty is compounded by the fact that the provision of the author’s original draft Bill and subsequent Government drafts[65], expressly requiring a significant effect on competition in the UK, has been omitted from the Act. A further complication is that the UK Act expressly provides limited immunity from fines for “small agreements”[66] and “conduct of minor significance”[67].  This might appear to imply that there is no general exclusion of such agreements and conduct from the operation of the Act, in that otherwise these provisions would be redundant.  However, the OFT has power to remove the immunity if it considers that the agreement or conduct is likely to infringe Chapter I[68] or Chapter II[69].  Accordingly these provisions provide an additional immunity from fines to certain agreements and conduct which may nevertheless be found to infringe the Act, and are not inconsistent with a general requirement of appreciable effects.

Despite the difficulties, it seems that a requirement of appreciable effects should be imported by the EC interpretation clause, since the absence of such a requirement would give rise to a significant inconsistency between the application of the UK and EC law, contrary to section 60.  Guidance prepared by the OFT assumes this conclusion.

It is now convenient to return to the questions identified above regarding the impact of the UK Act on private rights.

How void are agreements prohibited by Chapter I? 

Both Article 85(2) of the Treaty of Rome and section 2(4) of the UK Act provide without qualification that a prohibited agreement is void.  However, the European Court has held that only the restrictive clauses of the agreement are invalidated by article 85(2), and that it is for national law to determine the effects on other provisions of the agreement and orders and deliveries made under it[70].  Thus section 60 of the Act results in a kind of renvoi to the principles adopted by the UK courts where agreements are caught by article 85.

English courts have held that the provisions of agreements which are invalid under article 85(2) are severed, leaving the rest of the contract valid and enforceable, if the invalid provisions are “textually severable” (in that they can be struck through with a “blue pencil” without altering any other language) and if this does not frustrate the contract or deprive the remaining provisions of the main consideration for them[71]. In view of this prospect, agreements are often drafted with structured and sometimes partially repetitive provisions, so that if a broader restriction is held invalid, it can be excised leaving narrower restrictions intact.

It could be argued that the test of “substantial severance” adopted by the House of Lords in DPP v Hutchinson[72] in relation to delegated legislation is more rational and less formalistic, and that the principles applied in relation to article 85 and Chapter I should be revised.  Under the “substantial severance” test, invalid aspects can be removed, whether or not the wording can be textually severed, provided that the substance of the remaining provisions is essentially unchanged.  However, the “blue pencil” test is well entrenched in relation to agreements in restraint of trade and it seems likely that it will continue to be followed in the application of article 85 and Chapter I unless an appellate court can be persuaded to review the whole area in an appropriate case.

Where several provisions of an agreement are caught by article 85(1) and most, but not all, of them would be exempted, for example under a block exemption, the conventional view has been that the remaining restrictions prevent the exemption, and all of the restrictions caught by article 85(1), including those which by themselves would be exempted, are then invalid[73].  However, in Byrne v Inntrepreneur[74] Neuberger J held that a contractual provision alleged to prevent the application of the bloc exemption could be treated as excised under an express contractual provision for severance of invalid terms.  The drafting of boilerplate severance clauses should be considered carefully in the light of this decision.

It may be possible to resolve these difficulties under the UK Act by applying for an individual exemption.  In contrast to the position under EC Regulation 17[75], the Act does not preclude the possibility of an exemption taking effect from a date earlier than the application for exemption; it merely provides that an exemption may be granted so as to have effect from a date earlier than when it was granted[76].

However, this approach may not assist a party complaining that conduct by the other party is contrary to the conditions of a block exemption. In Richard Cound v BMW[77] the Court of Appeal held that if BMW’s conduct deprived the dealership agreement of the benefit of the block exemption, many of its provisions were caught by article 85(1) and therefore void, with the result that the whole agreement was invalid and the claimant could not rely on it.

Transfers of property and money under invalid agreements give rise to difficult questions.  In relation to article 85(2), the European Court appears to have held that this is also a matter to be determined under the applicable national law[78]. In Tinsley v Milligan[79] the House of Lords held that the basic principles of English law were:

(a)    The court will not assist the enforcement of executory provisions of an illegal agreement.

(b)   A party may not rely on illegality to assist a claim or rebut a presumption.

(c)    However, an executed transfer of property pursuant to an illegal agreement is valid, whether the property is legal or equitable, registered or unregistered.

On the other hand, in Kleinwort Benson v Lincoln[80] the House of Lords held that money paid under an unlawful interest rate swap agreement, in the mistaken belief that it was valid, was recoverable by the payer, even though the mistake was as to the law rather than the facts.  The House accepted that the general principle of restitution of money paid under a mistake which they laid down should be subject to defences such as change of position, compromise and settlement of an honest claim, and left the details to be worked out in subsequent cases and/or legislation.

In Gibbs Mew v. Gemmell[81] the Court of Appeal held that restitution was not available in relation to money paid under an agreement contrary to article 85. They distinguished this from an unlawful interest rate swap agreement, on the ground that an agreement in breach of article 85 was illegal rather than merely unlawful.  However, it is submitted that this distinction is difficult to justify, since in both cases official enforcement follows an administrative procedure and financial penalties can be imposed if the breaches of the rules were deliberate or negligent. The distinction would be particularly difficult to justify in relation to breaches of Chapters I and II of the Act, since the procedure is clearly differentiated from that of the criminal law of the UK.  It can also be argued that Gibbs Mew v Gemmell should be reconsidered in the light of the subsequent reformulation of the law of restitution by the House of Lords in Kleinwort Benson v. Lincoln.

If both Tinsley v. Milligan and Kleinwort Benson v. Lincoln are applied to agreements relating to intellectual property, and Gibbs Mew v Gemmell is distinguished or overruled, the position may be as follows.  Where a void provision of an agreement provides for an assignment which has not yet taken place, for example the grant-back of future patents, a party will not be ordered to execute it.  Where the assignment has taken place in law or in equity, the transfer will be treated as effective, even if formalities such as registration have not been completed; but the assignor may be able to claim restitution of intellectual property transferred in the mistaken belief that the agreement was valid.   Similarly, if a provision for the payment of royalties is void, for example because the rate is excessive, the payer will not be forced to pay royalties which have not yet been paid.  Royalties which have been paid belong to the payee, but the payer may be able to recover excess royalties paid in the mistaken belief that they were due.

Is conduct prohibited by Chapter II also void?

The Competition Act does not provide that an abuse of dominant position contrary to Chapter II is void.  Furthermore, the European Court has held that conduct in breach of Article 86 is not a nullity and that it is for national courts to determine whether and to what extent any abuses affect the interests of the parties, and hence the consequences of such abuses with regard to the validity of any contracts in dispute[82]. 

If the principles set out in Tinsley v Milligan and Kleinwort Benson v Lincoln are applied, the court will not assist a party to carry out illegal conduct, for example the enforcement of an executory agreement which is itself an abuse of dominant position, but will not reverse acts which have been carried out, unless a party is entitled to restitution on the ground of mistake.

However, there is a further principle which may be relevant in relation to abuse of dominant position.  Where the parties are not in pari delicto, and in particular where one party is a member of the class of persons which the prohibition aims to protect, an agreement may held to be enforceable on the part of the protected party, but not the guilty party[83].  On this basis an agreement which is part of an abuse of dominant position may still be enforceable by a victim of the abuse.  For example, a licensee under a mandatory package licence may be entitled to rely on it, even if it is an abuse of dominant position by the licensor and the licensor would not be able to enforce it against the licensee.  There may also be less risk in a case of abuse of dominant position of the complainant being met by the argument that if it were right, its licence would be wholly void, as in Richard Cound v BMW[84]. 

Can damages be claimed?

Under conventional UK principles of statutory interpretation[85], the Competition Act might have been regarded as not conferring any private right of action for damages. The prohibitions serve the general public interest and the Act provides an elaborate system for enforcement and for immunity where agreements and conduct are notified to the OFT.  It would seem to contradict the careful arrangements protecting parties who have notified the OFT if they remain exposed to civil liabilities which could be very substantial. 

It has been suggested that clauses in the Act providing for the use of the OFT’s findings of fact and information in court proceedings[86] indicate that the Act confers rights to claim damages[87]. However, these provisions could be explained as referring to proceedings relating to the validity of agreements.

On the other hand, the EC interpretation clause specifically provides that it applies to decisions as to the liability of an undertaking for harm caused by its infringement of Community law.  It is therefore necessary to consider the position under Community law.

The European Court has held that Articles 85 and 86 have direct effect and confer rights on private parties which national courts must protect[88]. The European court has not expressly stated that private parties must be able to claim damages.  However, in accordance with general principles of EC law, the protection of these rights in national courts must be effective and not less favourable than the protection accorded to similar rights under national law[89]. The UK Act could be said to make the second criterion circular, but there is a strong argument based on the first criterion that the protection of the rights would be ineffective if damages could not be claimed[90]. 

The observations of the majority of the House of Lords in Garden Cottage Foods[91] strongly support the view that damages can be claimed for infringement of articles 85 and 86, but do not constitute a clear decision to this effect. Some doubt was cast on this view by the decision of the majority of the Court of Appeal in Bourgoin[92], which seemed to hold that judicial review provided an effective remedy against the state for breach of article 30.  However, that decision has been undermined by the subsequent decisions of the European Court in Francovitch[93] and Factortame[94].  It is submitted that it is highly likely that the availability of damages for breaches of articles 85 and 86 will be confirmed.

Given the clear requirement of consistency with the application of EC competition law, it is submitted that this point does not require reference to the Green or White Papers or to Hansard in accordance with Pepper v Hart[95].  However, both the Papers[96] and statements by Ministers[97] make it very clear that the Act was intended to enable third parties to claim damages, and this certainly strengthens the argument based on the application of EC competition law.

Even if damages can in principle be claimed for breaches of article 85 of the Treaty of Rome, and hence Chapter I of the Act, the English Court of Appeal held in Gibbs Mew v. Gemmell[98] that they cannot be claimed by a party to the agreement, since it would have to rely on its own illegality.  This was so even where the agreement was effectively imposed on the claimant by the other party.  The Court of Appeal considered that the parties were in pari delicto since the duty to comply with article 85 rested on each of them and was owed to third parties rather than the other contractor.  This decision has since been followed by the High Court in Inntrepreneur v Crehan[99] and the Court of Appeal in Trent Taverns Ltd v Sykes[100]. 

From the point of view of the public interest in the effective enforcement of competition law these decisions are regrettable.  A party to an anti-competitive agreement often has a greater interest and better information than third parties to expose its incompatibility with competition law.  Furthermore, the Court of Appeal’s analysis of the function of article 85 appears to be unduly restrictive, and it remains to be seen whether it will be overturned. The central point is a question of E.C. law which should be referred to the European Court.  In accordance with the E.C. interpretation clause of the UK Act, the application of Chapter II should follow the result under Article 85 of the Treaty.

In Gibbs Mew v. Gemmell The Court of Appeal considered that the position would be different under article 86 since the duty is imposed by that article only on the dominant party.  Nevertheless, an agreement which constitutes an abuse of dominant position in breach of article 86 or Chapter II is likely also to contravene article 85 or Chapter I, and it could still be argued that the victim cannot rely on its participation in such an agreement even in a claim for damages under article 86.

Despite Gibbs Mew v Gemmell it may still be possible for a party to a prohibited agreement to claim damages for misrepresentation as to its validity.  Such a claim was held by Neuberger J to be arguable in special circumstances in Byrne v Inntrepreneur[101].

Can injunctions be claimed?

Even if there is still room for argument as to whether damages can be claimed for infringement of articles 85 and 86, it seems clear that injunctions can be granted to prevent infringements[102]. In accordance with the requirement of consistency under the EC interpretation clause, injunctions should also be available to restrain threatened breaches of the Competition Act.

However, there are unresolved issues as to whether an injunction should be granted requiring a party to deal with the claimant.  One type of situation is where the claimant alleges that the other party is refusing to supply goods or to grant a licence except on terms contrary to the Chapter I prohibition.  Another example is where the refusal to supply is contrary to a condition of exemption of existing agreements.   

In one case an injunction was granted to restrain a brewery from giving notice of termination of a lawful tied house agreement in accordance with its provisions where the purpose of doing so was to force the other party to accept a revised agreement in breach of article 85[103].  However, it could be argued that there is a distinction between prohibiting a party from terminating an existing contract for an illegal purpose and ordering a party to do something which it has no obligation to do because it is seeking to do something else which is illegal.

In ITP v Commission[104] the European Court upheld the Commission’s order requiring the supply of information about television schedules and a licence to publish them on reasonable terms.  The European Court of First Instance has also upheld an interim order of the Commission requiring goods to be supplied on reasonable terms pending a final decision[105].  On the other hand, in Automec[106] the European Court of First Instance considered that the Commission was not entitled to require goods to be supplied to a dealer where this was only one of several ways of complying with the requirements of EC competition law; and that it was for the national courts to determine the private law remedies available to the parties where article 85 was infringed. 

The power of the OFT to give directions “to bring the infringement to an end” is in similar terms to the power of the EC Commission under article 3 of Regulation 17.  It can therefore be argued that the OFT has power to order a party to supply on an interim basis and on a permanent basis where this is the only practical method of compliance with the Act.  However, it appears that the courts may have wider powers to grant injunctions under the Act.

Does the Competition Act affect the enforcement of intellectual property? 

The UK Act does not contain any express provision specifying how it applies to intellectual property.  However, as discussed above, it appears that principles developed by the European Court in the application of articles 85 and 86 of the Treaty of Rome are to be applied under the Act in accordance with the requirement of consistency laid down by its section 60, despite the different context and the absence of provisions corresponding to articles 36 and 222 of the Treaty of Rome.

The European Court has held that the exercise of an intellectual property right is contrary to article 85 “whenever it is the object, the means or the consequence of an agreement” prohibited by that provision[107]. For example, where different parties register corresponding rights in different countries under an agreement to partition the market contrary to article 85, the enforcement of the rights is prohibited by Article 85[108].  It is submitted that the formula “the object, the means or the consequence” should be taken to refer to the restrictions on competition in the offending agreement and not to other provisions, in the same way as voidness under article 85(2) affects only the restrictions on competition[109].  It is also submitted that “consequence” imports a concept of causation: the restriction on competition must be the effective cause of the exercise of the intellectual property right which is challenged[110].

English courts seem to have been reluctant to use the formula “object, means or consequence of a prohibited agreement”, but have acknowledged the possibility of a defence to a claim of infringement where the purpose of the action is to force a party to enter into an agreement contrary to article 85[111].  In Phillips v Ingman[112] (14/5/98) Laddie J held that there was an arguable defence that the infringement proceedings were brought pursuant to an agreement for the pooling and reciprocal enforcement of patents caught by article 85 and/or to impose an agreement providing for excessive royalties contrary article 85.  However, he did not use the phrase “object, means or consequence” in his reasoning.

It is submitted that the criterion of “object, means or consequence”, as interpreted above,  is intelligible and rational, and should be applied by English courts in relation to article 85 of the Treaty and Chapter I of the Act.  It may differ slightly from the principles of English law applicable to illegal agreements as expounded by the majority in Tinsley v Milligan[113], in that it prohibits the enforcement of rights where this is the consequence of an illegal agreement which has been executed.  However, this is not an unreasonable approach, as the diversity of opinion in the House of Lords and earlier English case law demonstrates.  Indeed the classic judgment of Lord Mansfield in Holman v Johnson[114] dealt with a point which seems to have influenced English courts in relation to Euro-defences in some cases, that the defendant has little merit:

“The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant.  It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say.  The principle of public policy is this; ex dolo malo non oritur actio.  No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act.  If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted.  It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff.”

In relation to article 86, the European court has held that it is for the national courts to determine the effects of an abuse of dominant position with the regard to the rights of parties[115].  However, the European Court has also indicated that the exercise of an intellectual property right is contrary to article 86 if it involves abusive conduct by a dominant undertaking (such as arbitrary refusal to supply independent repairers, refusal to supply spare parts for products still in widespread circulation, or excessive prices)[116] or if it is the instrument of an abuse[117].  Thus it appears that a partial renvoi operates here under s.60 of the Act: to some extent the effects of an abuse on the rights of parties must be determined under English principles, but criteria indicated by the European court must also be applied.

In the Pitney-Bowes case Hoffman J held that it was arguable that there could be a defence to an infringement action if the existence of the intellectual property right created or buttressed a dominant position which the plaintiff was abusing, and that the abuses need not be a direct or even an indirect consequence of the relief claimed in the particular action[118].  However, English courts have generally considered that article 86 can only provide a defence to an infringement action if there is sufficient ‘nexus’ between the invocation of the intellectual property right and the abuse, but that no nexus was established in the particular case[119]. The nature of the nexus required has not been defined.  In Chiron v Murex[120] Staughton LJ considered that there was no nexus between allegedly excessive prices for a patented product and enforcement of the patent against infringers, in that the refusal of relief for infringement would be a disproportionate and inappropriate remedy for the excessive prices.

It is submitted that the term “nexus” is not helpful but that Staughton LJ’s approach is correct.  It is consistent with the rulings of the European Court that if abuses are exposed it is for the national court to determine whether and to what extent they affect the interests of the parties, and hence the consequences of such abuses with regard to private rights[121].  Relief for infringement should be denied either if the action for infringement is itself part of an abuse, or if and to the extent that the refusal of relief is an appropriate remedy for the abuse. 

Thus in some cases, it may be appropriate to refuse relief altogether, for example where a dominant plaintiff has acquired the intellectual property right by an abusive grant-bank imposed on a licensee, and should not obtain any benefit from it.  In other cases, as where the plaintiff is abusing a dominant position by refusing to supply an ancillary market, it may be appropriate to refuse an injunction and to award damages in respect of the use of the right.  This would ensure that the market is supplied while recognising the plaintiff’s contribution in creating the subject-matter.  In this situation the alternative remedy of a possible order of the OFT or EC Commission requiring the plaintiff to supply the ancillary market would be problematic: it might be outside their power[122] and might not be implemented by the plaintiff with maximum enthusiasm.  Finally, in other cases, for example excessive prices, refusal or qualification of relief for infringement of the intellectual property right may be an inappropriate remedy for the abuse and provide an unmerited windfall to the infringer.  In this situation the more appropriate remedies may be: payment of damages (or repayment) to those who have paid too much for the goods; an injunction at the suit of a person who needs the goods requiring the dominant undertaking to supply them at a lower price; an order of the OFT or Commission that the price be reduced; and possibly a fine.

Will it work?

The issues discussed above are difficult but important. The recent, influential report by the McKinsey Global Institute, Driving Productivity and Growth in the UK economy, comments:

“Our work in the United Kingdom and in other countries studied by the McKinsey Global Institute demonstrates the enormous influence of competitive intensity on the rate of innovation and adoption of global best practices in a sector, and thus on growth in the economy as a whole. There is a strong case for a more robust and focused competitive framework designed specifically to promote economic efficiency, not just prevent abuses of market power. ….. A new competition framework will need to address the productivity challenge facing the United Kingdom by:

·    Refocusing the objectives of competition policy on economic efficiency and productivity. This will entail clarifying the primacy of efficiency over other objectives in the exercise of competition policy.

·    Strengthening the bodies responsible for enforcing competition rules, and clarifying their roles. These institutions will need to have the resources and authority to investigate all substantial breakdowns in competitive intensity, identify any root causes and devise appropriate remedies.

·    Strengthening the mechanisms used to identify inappropriate competitive behaviour and penalise those undertaking it. The impact of a competition framework depends not only on the action it takes to correct abuses of competitive power, but also on the broader incentives it creates for competitive behaviour. A number of mechanisms could be used to this end.  Private law suits, which are currently unavailable in the United Kingdom, could greatly increase the information and investigative resources available to the economy, making it more likely that anti-competitive behaviour will be detected or prevented. In addition, increasing the scale of penalties could have a substantial impact on incentives.

The proposed competition bill addresses some but not all of these issues. Its ultimate impact will depend on how vigorously it is executed.”

One thing is clear: the author’s radical opinion published in this journal in 1984 has become official thinking.

© Jonathan DC Turner 1998

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