Competition

Enterprise Act 2002

John Lambert

27 Mar 2003

Last updated 18 Dec 2005

By any standard, the Enterprise Act 2002 is a substantial piece of legislation. Consisting of 281 sections and 26 schedules, the Act

	establishes new competition authorities,
	reformulates the law relating to mergers and markets,
	criminalizes certain anti-competitive behaviour,
	penalizes with disqualification directors of companies engaged in anti-competitive practices,
	extends the collective protection of consumers; and
	makes substantial changes to personal and corporate insolvency law.

The Act received royal assent on 7 Nov 2002 and came into force gradually over the subsequent financial year.

Background
On 18 June 2001 the Chancellor of the Exchequer and Sec. of State for Trade and Industry proposed a package of measures for the present parliament with the aim of narrowing a gap ("the productivity gap") between output per head in the UK and that in the USA, France and Germany. Their proposals included:

	major reforms to the competition regime and
	reforms to insolvency laws.

The proposals for reforming competition and insolvency law were amplified by white papers on competition and insolvency reform published at the end of July 2001 entitled respectively, "A World Class Competition Regime" and "Productivity and Enterprise - A Second Chance".

According to Chancellor and Secretary of State "competition is at the heart of the government's strategy to close the productivity gap." Their premise is that vigorous competition between firms leads to increased innovation and greater efficiency leading to increased productivity growth and that consumers get a better deal because firms have to reduce prices and improve quality to get work.

Various ways of strengthening consumer protection had been canvassed in the white paper Modern Market: Confident Consumers in July 1999. A list of 90 proposals in an implementation timetable included strengthening the Director-General of Fair Trading, provision for consumer organizations to make complaints to the Director in respect of whole industries or market sectors on behalf of the public and a wider range of enforcement measures.

Competition Policy Objectives
The government translated those recommendations into 6 policy objectives:

	competition decisions should be taken by strong, pro-active and independent authorities;
	the regime should root out all forms of anti-competitive behaviour;
	there should be a strong deterrent effect;
	injured parties should be able to get redress;
	government and competition authorities should co-operate to achieve greater consistency; and
	competition policy should have a high profile.

These happen to coincide with changes to EC competition policy which will devolve responsibility for enforcement of arts. 81 and 82 of the Treaty of Rome to national competition authorities. All of those objectives were intended to be tackled by this legislation.

Insolvency Reform
The premise for reform of insolvency law is that fear of failure is a powerful disincentive to starting up new business. The hope appears to be that some of that fear of failure may be assuaged by assisting businesses in difficulty to ride out their difficulties by providing alternatives to receivership and liquidation and alleviating the consequences of bankruptcy by removing some of the disabilities that follow bankruptcy. The key
proposals were:

	making greater use of collective procedures benefiting all creditors and not just those with security;
	abolishing the Crown's preferential creditor status;
	reducing the consequences of personal insolvency in most cases; but
	increasing the penalties for those who are dishonest.

Outline of the Act
The Act consists of 11 parts covering the following topics:

	Part 1: establishes the Office of Fair Trading ("OFT") on a statutory basis, sets out its general functions, and provides for "super-complaints";
	Part 2: establishes a Competition Appeal Tribunal ("CAT");
	Part 3: provides for a new merger regime, covering the definition of a qualifying merger, the duty of the OFT to make references to the Competition Commission ("CC"), sets out how references are to be determined, provides for certain public interest case exceptions and other special cases, confers powers of enforcement including undertakings and orders;
	Part 4: provides for market investigations conferring power on the OFT and the Secretary of State to make references to the CC, and setting out how the CC should report on such references with exceptions for particular public interest cases;
	Part 5: provides for the CC, its rules of procedure;
	Part 6: created new cartel offences;
	Part 7: provides for disqualification of directors who engage in serious competition breaches;
	Part 8: provides for new procedures for enforcing certain consumer legislation, and miscellaneous related matters;
	Part 9: provides for rules to govern the disclosure of specified information held by a public authority, setting out the circumstances in which the information may be disclosed, and various related matters;
	Part 10: changes insolvency law by providing for a new regime for company administration and restricting the future use of administrative receivership, abolishing Crown preference, establishing a new regime for the insolvency of individuals, and making changes to the operation of the Insolvency Services Account; and
	Part 11: contains a number of supplementary provisions, such as commencement, short title and territorial extent.

Although the insolvency provisions are very important, this is essentially a competition statute. Probably the most important provisions are institutional with the establishment of the OFT and the separation of the reporting and tribunal functions of the CC, extensive de-politicizing of merger control and market enquiries, criminalizing and penalizing certain anti-competitive behaviour and the extension of remedies to consumers.

Competition Act 1998
The Act supplements the Competition Act 1998, which repealed inter alia the Restrictive Practices Court Act 1976, Restrictive Trade Practices Act 1976, Resale Prices Act 1976 and he Restrictive Trade Practices Act 1977, and sections 2 to 10 of the Competition Act 1980 and replaced them with two new statutory prohibitions known respectively as the:

Chapter I Prohibition modelled on art. 81 of the Treaty of Rome: s.2 (1) of the Competition Act 1998 prohibits agreements between undertakings, decisions by associations of undertakings or concerted practices which may affect trade within the United Kingdom, and have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom unless they are exempt in accordance with the provisions of Part 1 of the Act; and the

Chapter II Prohibition modelled on art. 82: S.18 prohibits any conduct on the part of one or more undertakings which amounts to an abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.

The mechanism for enforcing the Competition Act 1998 was also modelled on Community practice as it had existed more or less unchanged for some 40 years. Regulation 17/62 gave the Commission sole power to determine whether an agreement, decision or concerted practice infringed art. 81 (1) of the Treaty of
Rome and, if it did, whether the same should be exempted from the prohibition. The Commission also had sole power to determine whether there had been an abuse of a dominant position. Any agreement, decision or concerted practice that might have infringed art. 81 (1) of the Treaty had to be notified to the European Commission and, if it was not, it could not be exempted from the general prohibition under the exception provided by para. (3) of that article. The Commission had extensive investigatory and enforcement powers which included ordering infringements of arts. 81 and 82 to stop and fining infringers.

Under the Competition Act 1998 the Director-General of Fair Trading performs a similar role. Until 1 May 2004 he can order infringements of the Chapter I and Chapter II prohibitions to end under s.32 and 33, apply to the Court for injunctions if the infringers fail to comply with his directions and levy financial penalties on infringers.

Before the Competition Act 1998 a body known as the Monopolies and Mergers Commission carried out a number of investigatory and reporting functions under the Fair Trading Act 1973. The Competition Act 1998 dissolved the Monopolies and Mergers Commission and transferred its functions to a new body called the Competition Commission. This Commission acquired a number of additional functions under the 1998 Act including, in particular, hearing appeals from decisions of the Director-General of Fair Trading on the enforcement of Chapter I and II prohibitions.

Reform of EC Competition Law
Although the system for enforcing art. 81 and 82 had worked well for many years it had a number of drawbacks:

	very large numbers of applications were made to Brussels which swamped the Commission's resources;
	as notification provided provisional immunity from fines and under art. 81 (1) and as no other authority in the Community could investigate alleged infringements the procedure, provided in practice an easy way of circumventing effective antitrust enforcement in some cases; and
	parties who might be prejudiced by infringements of arts. 81 and 82 had no effective redress from their courts unless and until the Commission investigated the alleged infringement which in most cases it could never manage to do.

The Commission white paper on modernization of the rules implementing articles 85 and 86 of the EC treaty published on 28 April 1999 proposed, among other things, the enforcement of Community competition policy by the competition authorities of member states.

That proposal was accepted by the Council of Ministers which adopted the Modernization Regulation (Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty)  which came into force on 1 May 2004. This new regulation confers upon national competition authorities the power to apply arts. 81 and 82 EEC in individual cases. Art. 6 of the regulation also enables national courts to apply arts. 81 and 82 of the Rome Treaty. The competition authorities and courts of member states are required by art. 3 to enforce Community law when enforcing their national competition laws.

The New Institutions
These developments require robust institutions which the Enterprise Act 2002 provides by

	establishing the body of civil servants who support the Direct-General of Fair Trading known informally as the "Office of Fair Trading" into a powerful new statutory body;
	conferring new investigatory and enforcement powers in competition and consumer protection policy upon the OFT;
	splitting the judicial and reporting functions of the Competition Commission into the CAT and CC;
	giving the CC enforcement powers on mergers and market investigations which are at present exercised by the Secretary of State; and
	extending the jurisdiction of the CAT beyond that previously enjoyed by the CAT.

These are explored in detail in my briefing paper "The Enterprise Act 2002: the Provisions that affect IP and Technology."

The OFT
S.1 (1) of the Enterprise Act places the OFT on a statutory basis:

"(1) There shall be a body corporate to be known as the Office of Fair Trading (in this Act referred to as "the OFT")."

S.2 (1) transfers the functions of the Director-General of Fair Trading together with his property, rights and liabilities to the OFT. The office of the Director is abolished by s.2 (2). S. 2 (3) provides that:

"Any enactment, instrument or other document passed or made before the commencement of subsection (1) which refers to the Director shall have effect, so far as necessary for the purposes of or in consequence of anything being transferred, as if any reference to the Director were a reference to the OFT."

Thus the investigatory and enforcement functions under Chapter III of the Competition Act 1998 are to be performed by the OFT.

The functions of this new statutory body include:

	Information Gathering: obtaining, compiling and keeping under review information about matters relating to its functions. That function is carried out with a view (among other things) of ensuring that the OFT has sufficient information to take informed decisions and to carry out its other functions effectively. In performing that function, the OFT may carry out, commission or support research financially or otherwise.
	Providing Information to the Public: The OFT is required to make the public aware of the ways in which competition may benefit consumers in, and the economy of, the UK and to provide information or advice in respect of matters relating to any of its functions to the public. In carrying out such functions, the OFT may publish educational materials or carry out other educational activities, or support others in carrying out those activities.
	Advising Ministers: The OFT makes proposals, or gives other information or advice on matters relating to any of its functions to any Minister of the Crown or other public authority including proposals, information or advice as to any aspect of the law or a proposed change in the law on request or otherwise.
	Promoting good Consumer Practice: The OFT has the function of promoting good practice in the carrying out of activities which may affect the economic interests of consumers in the UK. In carrying out that function the OFT may make arrangements for approving consumer codes or withdraw such approval. A "consumer code" in this context means a code of practice or other document (however described) intended, with a view to safeguarding or promoting the interests of consumers, to regulate by any means the conduct of persons engaged in the supply of goods or services to consumers (or the conduct of their employees or representatives;
	Regulatory Functions: These include referring completed and anticipated mergers to the CC, seeking and enforcing undertakings, investigating markets and making references to the CC, prosecuting cartel offences, initiating directors' disqualification proceedings, investigating super-complaints and enforcing consumer legislation.

Competition Commission
Although the CC lost its judicial role it acquired new powers to determine whether action should be taken in respect of merger and market references under Parts 3 and 4 of the Act except in special public interest cases. Even in those cases, the CC reports to the Secretary of State and suggests possible remedies to him or her.

Competition Appeal Tribunal

Two new institutions are the CAT and the Competition Service which funds and supports the CAT. The CAT consists of a legally qualified president, a panel of legally qualified chairpersons and a panel of  ordinary members.

Appeals against decisions of the OFT under Chapter III of the Competition Act 1998
pursuant to s.46 or s.47 of that Act now lie to the CAT rather than to the CC. The CAT's jurisdiction is very much wider than the CC's. In the first place, s.16 (1) (a) (i) of the Enterprise Act enables the Lord Chancellor to make regulations enabling the High Court or any county court to transfer to the CAT for its determination so much of any proceedings before it as relate to whether or not the Chapter I or II prohibitions under the Competition Act 1998 or articles 81 or 82 of the Treaty of Rome have been, or are
being, infringed. Such regulations will also enable the transferring court to give effect to the tribunal's determination of such issues. Secondly, s.18 amended the 1998 Act by inserting a new s.47A conferring jurisdiction on the tribunal to hear claims for damages or other pecuniary relief for loss or damage suffered as a result of an infringement of the Chapter I or Chapter II prohibition, art 81 or 82 of the Treaty of Rome, or of the corresponding articles45 of the European Coal and Steel Community Treaty. Further, a new s.47B of the 1998 Act inserted by s.19 of the 2002 Act allows a body specified in an order to be made by the Secretary of State to bring a claim under s.47A on behalf of at least 2 individuals in respect of the supply of goods or services that such individuals receive or should receive otherwise than in the course of a business from one who supplies those goods or services in the course of a business.

Further Information on the Internet
A good starting point is the website of the DTI's Consumer and Competition Policy Directorate. This web provides information on a wide variety of consumer and competition policy issues, including the legislation background including competition authorities, competition policy, legislation, consumer protection, European legislation and enforcement. The Insolvency Service also contained general advice on insolvency with articles, frequently asked questions and articles on the insolvency provisions. Another good website is the OFT. The site has many publications on the Enterprise Act
page which may be downloaded. Finally, the CC's website has plenty of useful materials on the Act, enforcement and general guidance.

 

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