Correct as of 5pm 31 March 2020. This article is not being maintained.
In the UK, as across the globe, COVID-19 has presented extraordinary difficulties for businesses and consumers alike. Supply chains focussed on daily essentials (e.g. food and medical supplies) are battling to keep up with unprecedented increases in demand, partly as a result of “panic buying”. Non-essential supply chains are witnessing reduced demand and significant losses. Unsurprisingly, this has resulted in capacity issues and solvency threats for key sectors (e.g. airlines).
In such a rapidly evolving situation authorities have already started relaxing regulation to allow key sectors to continue to function. In the competition sphere, the UK Competition and Markets Authority has not been slow to react on two important issues:
- When can competitors collaborate to ensure supply chain continuity?
- When will authorities take enforcement action against businesses exploiting the current situation to take advantage of people, for example by charging excessive prices or making misleading claims about in-demand products?
This alert looks at how the CMA has responded to these issues and how it proposes to monitor the situation and includes an updated summary of the CMA's 25 March 2020 announcement of the detailed criteria it anticipates applying when deciding whether to take enforcement action against COVID-19-related collaboration initiatives.
Can competition law be relaxed in a time of crisis?
In strict legal terms, UK competition law can only be suspended where the government intervenes directly on public policy grounds and has “exceptional and compelling reasons” to do so. Suspensions of competition law have rarely been applied in the UK, and, where they have, they have always been applied quite narrowly and for a limited time period. For example, in 2012 the government temporarily disapplied competition law to allow fuel suppliers to coordinate their activities to supply emergency and other critical service providers in the event of fuel shortages.
The European Commission has previously considered so-called “crisis cartels”, where competitors collaborate to rectify what they see as the risk of market failure, but the Commission has tended to refuse to allow a relaxation of EU competition law on the basis that markets should usually be expected to self-correct over time, even where they believe they are under threat, e.g. the airline industry post-9/11.
There is therefore a general reluctance to change the law except in truly exceptional times, and, where a temporary change is deemed absolutely necessary, the policy response is likely to be highly targeted and time-limited. That said, competition authorities may choose to enforce existing law more selectively, e.g. choose not to prioritise enforcement of competitor collaboration intended to ensure security of critical supply lines.
Collaboration and COVID-19
These, however, are exceptional times, and, on 19 March, the UK government indicated that there would be legislative change to allow a temporary relaxation of competition law to allow supermarkets to, among other things, (i) share data on stock levels (the exchange of which would normally be precluded under competition law); (ii) co-operate to keep shops open; and (iii) share distribution depots and delivery vans.
The CMA has gone further and confirmed that, in terms of its enforcement practice, it will not intervene in relation to any consumer-facing sector where it believes intervention is against the consumer interest (e.g. co-operation between businesses rationing essential supplies). At the same time, it has stated that it will continue to monitor activity and will penalise companies using the relaxed rules as a “cover” for practices which are illegal and for which there is no consumer justification, e.g. exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation.
Excessive pricing and COVID-19
Despite the UK government’s relaxation of the rules on anti-competitive agreements (as noted above), the same approach has not been taken in relation to competition and consumer law rules which protect against excessive pricing and misleading practices. The CMA made clear as early as 5 March that it would seek to enforce these rules against COVID-19-related price hikes and misleading claims.
Companies with a dominant market position must not exploit customers by charging an excessive price, i.e. a price which is clearly over the market value of their products. For the CMA to allege an abuse of a dominant market position, the CMA would need to demonstrate that the supplier in question enjoyed a dominant position (which is unlikely where the supplier has a market share below 40%, although markets may be defined narrowly), and that the price was above a fair market benchmark. Historically, like other competition law authorities, the CMA has been reluctant to use competition law as a form of price control. However, it has recently opened a number of cases relating to significant increases in drug pricing to the NHS. The CMA has therefore shown it is prepared to adopt a more interventionist approach to what it sees as excessive pricing. Therefore, given the current climate, the CMA’s enforcement activities on this issue may well extend to other consumer-facing sectors.
Equally, if a business makes misleading claims e.g. about the efficacy of protective equipment (e.g. hand sanitiser or face masks) and a consumer goes on to buy the product as a result of that information, the business is likely to breach consumer law. The CMA has made it clear that it will prioritise enforcement action in these cases.
The CMA has already contacted businesses and online platforms regarding excessive pricing of hand sanitiser. The CMA is not alone in this effort to clamp down on excessive pricing, and there are already global precedents where the Chinese and South Korean authorities have intervened against the high pricing of face masks.
CMA COVID-19 taskforce
To tackle competition and consumer harm arising from the pandemic as quickly as possible, the CMA is setting up a taskforce, which, among other things, will:
scrutinise market developments to identify harmful sales and pricing practices;
warn businesses suspected of exploiting these exceptional circumstances, e.g. through unjustifiable prices or misleading claims; and
take enforcement action if there is evidence that businesses may have breached competition or consumer law and they fail to respond to the CMA’s warnings.
Whilst the CMA may be diverting resource to this new crisis, it is keen to keep to statutory deadlines in its other work and is generally expected to continue its standard market surveillance for evidence of practices harmful to competition and consumer welfare.
Guidance on the CMA’s approach to business cooperation in response to COVID-19
On 25 March, the CMA issued extensive guidance on its approach to co-operation initiatives taken by competitors in response to the current crisis. The guidance generally underlines that the CMA's focus will be on the protection of consumers and that its main aim is to reassure businesses that proportionate measures which are clearly targeted at concerns arising from the current crisis will not be subject to competition law enforcement action. The CMA’s guidance document can be found here: https://www.gov.uk/government/publications/cma-approach-to-business-cooperation-in-response-to-covid-19.
In more detail, the guidance addresses two questions:
(i) how will the CMA prioritise cases when assessing cooperation initiatives relating to the crisis (in other words, when will it choose to investigate in the first place)?; and
(ii) when is it likely to regard such initiatives as fulfilling the safe harbour that exists within the UK prohibition on anti-competitive agreements (known as the “exemption criteria”)?
On the first question, the CMA states that it will not take enforcement action against measures to coordinate action where all of five criteria are satisfied:
- the measures are appropriate and necessary to avoid a supply shortage or ensure security of supply;
- they are clearly in the public interest;
- they contribute to consumer welfare;
- they deal with critical issues that arise as a result of the pandemic; and
- they are temporary, meaning that they must last no longer than is necessary to deal with the critical issues in question.
On the second question, the CMA's criteria for exempting measures involving collaboration are in essence comparable to its prioritisation criteria: in summary, to be exemptible, a measure must address the critical issue directly (for instance the measure prevents a shortage or allows the continuity or essential services or the introduction of a new essential service); and the measure must be proportionate to the nature of the critical issue in particular by being temporary and by not going further than what is reasonably necessary to achieve the COVID-19-related objective.
By way of comment on the guidance as to both enforcement and application of the exemption criteria, the CMA's lens does seem to be a narrow one: essential goods and services, shortages, vulnerable consumers, short term requirements, and so forth. That said, there is clearly room for interpretation as to how far this goes in practice.
The guidance also reiterates that the CMA intends to remain on the alert for measures which opportunistically seek to exploit the crisis. The detail of the guidance addresses only the issue of competitor collaboration, but the CMA reiterates too that it will investigate cases of companies which abuse a dominant position by raising prices significantly above normal competitive levels. Interestingly, the CMA does not consider the possibility of how other forms of potential abuses of dominance (such as predatory pricing or bundling) may arise in the current context or whether the CMA's approach on those issues may be tailored to the specific circumstances of COVID-19. This may suggest that the CMA’s approach to abuse of dominance cases may well reflect its usual practice, whereas its approach to agreements between competitors may show greater flexibility (provided the criteria in the guidance are met).
On a final procedural note, possibly the most interesting aspect of the guidance is the CMA’s statement that, where the application of its criteria is unclear in relation to a critically important matter, the CMA may accept to offer informal guidance about its enforcement priorities “…on a case-by-case basis, to the extent that this is possible given current CMA staffing constraints”. The CMA (as the guidance points out) does not give formal guidance or exemption decisions (although there is in existence a little used guidance procedure). The CMA is and is free to choose when it issues an informal view, but it may be anticipated that the current crisis will involve borderline cases and companies may seek to avail themselves of this informal guidance option. It is questionable, however, whether guidance may be forthcoming in a commercially useful time frame, and parties may ultimately need to rely on their own (professionally informed) assessments.
Note on the approach of sector regulators
As regards the financial sector, on 27 March 2020 both the Financial Conduct Authority and the Payment Systems Regulator announced their support of the CMA’s guidance and confirmed they anticipated adopting an approach consistent with the CMA's in their competition law enforcement activity during the crisis – see https://www.fca.org.uk/news/statements/fca-and-psr-respond-cmas-guidance-business-cooperation-under-competition-law. It seems reasonable to expect a harmonised approach from other sector regulators with concurrent competition law powers, but to date no other announcements have been made.
The UK government’s and the CMA’s communications and guidance relay a double-message: the enforcement of the rules will be permissive where there is a clear consumer-based justification; but this will not stop scrutiny of unfair practices. In parallel at the broader European level, on 23 March, the European Competition Network released a statement conveying both messages in similar fashion (which it has since updated with dedicated guidance). In many ways, in the UK and beyond, compliance is even more important in the current environment given that the recent announcements show that, even though the rules are being relaxed and many practices will be allowed, supply chain behaviour is very much on the authorities’ radar.