With the number of failing businesses on the up and a swing of serious investigations to conclude, 2009 is set to be a tough year for the OFT. Lesley Ainsworth reports

E0b013b0-fa8c-412e-b9d1-bed8ed279100In an economic climate in which public confidence in competitive markets appears to have been dented, 2009 looks set to be a challenging year for those engaged in enforcing and applying competition law and policy.

"Micro-surgery rather than drastic amputation" is how John Fingleton, chief executive officer of the Office of Fair Trading (OFT) has characterised his desire for an appropriate policy response to the credit crunch and recession, with competition authorities needing to be "both pragmatic and flexible in their application of competition policy" and yet recognising the benefits that effective competition enforcement brings.

So what approach will the UK competition authorities take in light of the economic downturn?

Business as usual?

Against the backdrop of uncertainty, the OFT enters 2009 with a stream of existing investigations remaining to conclude.

It is expected that at least three key OFT investigations will come to a head in the course of the year. The OFT is likely to issue its decision in the construction bid-rigging investigation and in its investigation into suspected price-fixing activities involving tobacco manufacturers and retailers. It is understood that the OFT also hopes to issue a decision against companies in its investigation into price-fixing in the dairy products sector.

On its face, decisions in these cases alone would make 2009 a relatively productive year for the OFT. In 2008, the OFT issued only one competition infringement decision, against Cardiff Bus for engaging in predatory pricing. There were, however, other notable achievements by the OFT in 2008, including reaching early resolution agreements with companies involved in the tobacco and dairy price-fixing investigations, issuing its long-awaited opinion on newspaper and magazine distribution, and securing its first criminal cartel conviction in the marine hose cartel case.

Concluding existing investigations is, to at least some extent, simply a case of tying up loose ends. A more compelling indication of the OFT's reaction to current economic conditions will be in the new cases that it chooses to pursue.

Antitrust: a question of priorities

There is general suspicion that, in a recession, businesses face an increased temptation to cartelise markets. Not surprisingly, competition law does not recognise a 'recession defence' to anti-competitive behaviour. Indeed, advocates of competition law enforcement would argue forcefully that allowing businesses to restrict competition when economic times are tough simply risks damaging markets in the longer term and undermining the wealth creation that open competition can bring.

However, while the law does not make allowances for economic conditions, the enforcement priorities of competition authorities can. The OFT's Fingleton has recently advocated the need for authorities to be pragmatic and flexible in their approach to competition policy. He favours a "'Goldilocks' approach: it needs to be just right; if too inflexible, we may cause wider harm to the economy in the short-term; if too flexible, we may cause greater long-term harm by undermining investment, incentives and innovation". He is quick to add that flexibility in enforcement does not mean weakening competition policy or enforcement. Rather, it means focusing on the areas where intervention is most important and engaging more creatively in areas where a lighter touch is possible.

Thus, in the coming year, we can expect enforcement activity by the OFT to be concentrated where the benefits to consumers and the economy are the greatest. This targeted form of enforcement is reflected in the OFT's Prioritisation Principles that were published in October 2008.

It is implicit from the OFT's approach to prioritising cases that there may be fewer 'smaller' cases taken up by the OFT. While the OFT clearly does not intend to suggest an institutional tolerance to illegal activity, it must take care not to send mixed messages to small firms. Businesses must not interpret the OFT's approach to enforcement as implying an acceptance of their anti-competitive conduct.

The OFT's intended approach is further reinforced by its suggestion in the Prioritisation Principles that private enforcement is a realistic alternative to OFT investigation. The likelihood of private damages actions is one of the factors that the OFT considers before launching enforcement actions against businesses.

There is no doubt as to the OFT's desire to stamp out anti-competitive behaviour. Nor can one fault its desire to apply its scarce resources in a flexible and pragmatic way. However, the challenge the OFT faces is to ensure that the business community continues to regard it as an active and effective enforcement agency.

Merger review in troubled times

While it remains open to debate whether recessionary times will increase the incidence of anti-competitive conduct, it is evident that economic woes lead some businesses to seek protection through industry consolidation.

As a matter of principle, the OFT and the Competition Commission are keen to underline that businesses should not expect favourable treatment in merger control reviews just because of the challenging environment. Fundamentally, the 'substantial lessening of competition' test against which mergers are reviewed in the UK remains unchanged, as does the authorities' application of the test.

In the coming months, one might, however, expect an increase in parties invoking the so-called 'failing firm defence' as justification for their mergers being allowed to proceed. In essence, failing firms would exit the market without the merger, such that the merger cannot itself be regarded as diminishing competition. While the failing firm defence has long been recognised by the competition authorities, it has been used successfully on only five occasions under the Enterprise Act 2002; most recently in the Competition Commission's decision in the Stilton merger (Long Clawson Dairy/Millway) which was cleared on 14 January, 2009.

However, prompted by economic and market conditions, the OFT has recently published a restatement of its position regarding the failing firm defence. The organisation indicated that, although the test remains unchanged, it is willing to provide informal advice in appropriate cases on whether particular businesses meet the failing firm criteria. This at least offers scope for businesses which are considering distressed mergers to obtain greater certainty as to whether their deals will be allowed to proceed.

Last year provided evidence that, in extreme circumstances, the UK merger control regime is sufficiently flexible to allow public interest considerations to trump competition concerns. Thus, the merger of Lloyds TSB/HBOS received merger control clearance, despite the OFT identifying likely competition concerns.

Such high-profile government intervention and swift legal reform (introducing a new public interest consideration of the maintenance of the stability of the UK financial system) has been criticised in some quarters as representing a re-politicisation of the merger control process. Others have commended the flexibility of the UK regime to cope with unprecedented financial crisis. It is also notable that the regime enabled the Lloyds TSB/HBOS merger to be cleared without compromising the OFT's freedom to review on its merits the transaction's likely impact on competition. A system under which the competition authority's findings with regard to competition can, in exceptional circumstances, be trumped by other considerations is surely better than a system in which a competition authority is under immense political pressure to conclude that no competition concerns arise.

Outlook

The outlook for the coming months appears to be one of pragmatic enforcement by the UK competition authorities who, while maintaining the importance of effective competition law enforcement, will conduct themselves in a manner that recognises current economic conditions. At a time when confidence in the benefits of a competitive economy is being tested, both competition authorities and businesses must avoid the temptation to bend the rules to breaking point. Pragmatism, flexibility and prioritisation must be the key themes in 2009 – and, above all, a steady measure of business as usual.

Lesley Ainsworth is a partner and Simon Barnes is of counsel in Lovells' competition and EU practice.