Restrictive agreements were declared unlawful in the US in Section 1 of the Sherman Act 1890 and further statutes confirmed and elaborated upon this, most notably the Clayton Act 1914 and the Robinson-Patman Act 1936. The tradition in the US is therefore hostile to most forms of agreement including not merely market sharing but price discrimination, tying contracts, full-line forcing (suppliers insisting that purchasers should buy an entire range of products made by a given producer), and other restrictions imposed on the buyer or seller of a good. In the UK, although the history of restrictive practices legislation began only with the Restrictive Trade Practices Act 1956, there is a similar presumption against all forms of restrictive agreement. Until 1998, the relevant legislation was embodied in the Restrictive Trade Practices Act 1976 and the Resale Prices Act 1976. All agreements taking a certain form and involving restrictions accepted by two or more parties had to be registered with the Director General of Fair Trading (DGFT) and placed on a register. The DGFT then referred registerable agreements to the Restrictive Practices Court (RPC). The RPC found an agreement contrary to the public interest unless it satisfied certain specific criteria called ‘gateways’, e.g. that it was necessary for the protection of health, or that it was ‘of substantial importance to the national economy’ or conferred other benefits on consumers. Any benefits had also to be big enough to outweigh the costs associated with an agreement (the ‘tailpiece’).
Unlike the discretionary system for monopolies and mergers, the control of restrictive practices in the UK at first sight appears rule-governed and dominated by a per se condemnation of all restrictions. However, primary legislation contains a large number of exemptions for particular sectors of the economy. Annex D of the Consultative Document Cm. 331 (DTI 1988) lists a total of forty-seven such exemptions. Indeed economic thinking has undergone a substantial transformation on these issues in the last two decades. In the areas of vertical agreements, agreements concerning patents or the use of know-how, cooperation on research and development, and the operation of franchise contracts, it has become accepted that prohibition of such agreements would give rise to large social losses. The basic point is that transactions between parties can take a whole spectrum of forms between those found on spot markets through longer-term market associations and franchising to full integration within a single firm. Restrictive practices legislation runs the risk of limiting economic organization to two basic forms – the fully integrated firm in which resources are allocated internally between specified parties and ‘outsiders’ are completely excluded, and the pure market contract in which transactors agree to deal with anyone and everyone on exactly the same terms. This is, on the face of it, most unlikely to be socially efficient.
Changing Opinion Concerning Vertical Restraints
In the US the most commonly cited evidence of the trend in opinion with respect to vertical agreements is the contrast between the Schwinn judgment in 1967 and the Continental TV v. GTE Sylvania case (1977). Schwinn was a manufacturer of high-quality bicycles and ran an agreement with franchised retailers that they would not resell to other dealers. This agreement was held to be anti-competitive by denying competing retailers access to Schwinn bicycles and customers the possibility of lower prices. No weight was given to transactional considerations – the desire by Schwinn to maintain its reputation for quality, the importance of after sales and repair services for some types of customer, the benefit of lower search costs for people who were specifically interested in the high quality product, etc. A decade later however, the judgment in Sylvania explicitly referred to the scholarly authority supporting the social utility of some vertical restraints and overruled the per se rule in Schwinn.
In the UK this changed perception is reflected in the Consultative Document Cm. 331 (DTI 1988). Paragraph 5.11 might have been written by Oliver Williamson himself.
In many cases [vertical] restrictions … are necessary to encourage the retailer to undertake investment to promote the product by giving him the assurance that other retailers … will not ‘free ride’ on the generated demand. As long as there is effective … inter-brand competition, the reduction in intra-brand competition arising from such practices should not matter.
In 1993 the MMC reported on the supply of fine fragrances. The leading makers all restricted supply to authorised retailers but the MMC found that this did not operate against the public interest. ‘Fine fragrances were luxury items and suppliers needed to be able to control distribution in order to protect their brand images, which consumers evidently valued’ (OFT 1993 p. 31).
In practice the administration of restrictive practices legislation has allowed a fair degree of discretion in decision-making. The Restrictive Practices Court considered only a small number of cases, while the ability of the DGFT with the permission of the Secretary of State to waive an investigation by the RPC when the restrictions involved in an agreement were of insufficient significance (section 21 (2)) ‘now dominates the whole process’ (DTI 1988 p. 29). ‘In the typical case the DGFT negotiates with the parties in order, if possible, to remove serious restrictions … Inevitably this process often takes a good deal of time … Overall the registration and subsequent negotiation process is wasteful of resources and damaging to the credibility of the legislation’ (p. 5). The requirement that all agreements taking a certain form be registered resulted in notification of large numbers of trivial and harmless agreements, while leaving the suspicion that important potentially anti-competitive ones escaped registration by careful draftsmanship. Critics also drew attention to enforcement problems. The probability of discovery if an agreement was unregistered was very low, and the consequences not severe. Firms merely received a ‘cease and desist’ order. Fines were imposed only if such orders are ignored.
These criticisms of restrictive practices policy led to a White Paper, Cm. 727 (DTI 1989) which announced the government's intention to remodel the legislation. Its proposals were not finally embodied in legislation until the passing of the 1998 Competition Act and took effect on March 1st, 2000. The new system is more in line with European Community processes and is based upon Article 85 of the Treaty of Rome (now Article 81 of the Treaty on European Union). There is a general prohibition of agreements which restrict or distort competition within the United Kingdom – the Chapter I prohibition – and an illustrative list of such agreements based upon Article 81(1) of the EC Treaty. Firms will operate any agreements at their own risk but can ask the DGFT for ‘negative clearance’ (i.e. that on the basis of the evidence provided, the agreement is not prohibited) or for exemption. Provision exists, as in the EC, for ‘block exemptions’, i.e. categories of agreement that are held not to infringe the criteria for exemption. This idea of a block exemption is consistent with the view that, far from being per se undesirable, certain types of agreement may be per se unexceptional or even valuable.
Policy towards enforcement has also changed radically. Penalties have increased. Civil penalties of up to 10 per cent of the UK turnover of a business or £250 000 if this is higher may be imposed for operating a prohibited agreement. Directors and managers may be liable to prosecution and penalties up to £100 000. There is no immunity simply by virtue of a firm having sought advice from the DGFT while operating what transpires to be a prohibited agreement. Private parties harmed by the operation of a prohibited agreement may bring an action and claim damages. Thus offending firms face the possibility of both a fine and damages.
These developments constitute a considerable change in the relationship between the regulatory authorities and private business. Given the penalties involved, some importance would be attached to gaining an exemption for otherwise prohibited agreements, and legal costs are likely to be higher than under existing procedures. Unlike the case of merger policy, the burden is on the applicant to show that an agreement should be exempted, and this is likely to require the development and presentation of a persuasive economic case.
