Keeping the playing field level

Legal Notes

With Malene C Alleyne

Wednesday, February 08, 2012

COMPETITION is a fundamental cornerstone of market economies. It not only fosters economic efficiency, but also promotes consumer welfare and protection.

With the opening up of sectors such as telecommunications and the introduction of new players into that sector, Jamaicans have seen benefits such as more competitive pricing and increased product quality. Monopolies, however, have a reputation of ousting the consumer king from its rightful throne. Some mergers can therefore cause anxiety and alarm for fear that a monopoly will reign. Regardless of any alarm which may arise from a merger, the fundamental question is whether it is in breach of any applicable law.

The legal framework for competition law is primarily found in the Fair Competition Act ("the Act"). The Act not only controls uncompetitive practices, but also bestows upon the Fair Trading Commission (FTC) fairly wide investigative powers. Indeed, one of the functions of the FTC is the investigation of breaches of the Act, either on its own initiative or at the request of any person.

The Act seeks to control uncompetitive practices in two ways. First, the Act addresses agreements containing provisions that have the effect of substantially lessening competition in a market. These provisions are not enforceable and include, for example, provisions that limit or control production. Interestingly, the Act looks not only at what the provision in fact says, but also at the effect likely to flow from such provision. Secondly, the Act provides for the detection and prohibition of an abuse of a dominant position and has detailed provisions in this regard.

Offences against competition are also outlined in the Act and include, among others, price fixing, bid-rigging, misleading advertising, double ticketing, sale at bargain price and sale above advertised price. It is also an offence to obstruct the investigation of the FTC or to give false or misleading information to the FTC.

The Act addresses other competition related issues, such as exclusive dealings and collective resale price maintenance. However, the Act is noticeably silent on mergers and acquisitions. In recent times, this silence has been heard loudly in the media and is the subject of much debate.

Jurisdictions with merger review policies recognise that certain mergers may substantially lessen competition and have deleterious effects on consumer welfare. Undoubtedly, one of the objectives of a merger is market power. Market power in turn makes it possible for corporations to profitably maintain prices above competitive levels for a period of time. To go further, market power may have a negative effect on product quality and this too must be factored into the competition analysis.

While some bemoan our Act's silence on mergers as a weakness, others optimistically point to the provisions relating to the abuse of dominance. It may therefore be useful to understand both the scope and limitation of these provisions.

Under the Act, where the FTC finds that an enterprise has abused a dominant position and that such abuse has, or is likely to have, the effect of substantially lessening competition in a market, the FTC will direct the enterprise to take the steps necessary to overcome the effects of abuse. An enterprise abuses a dominant position if it impedes the maintenance or development of effective competition in a market.

In assessing an abuse of dominance, the first step involves identifying the relevant market. This preliminary step is of utmost importance since the concepts of dominance and abuse do not exist in a vacuum, but rather are shaped in the context of the relevant market.

The relevant market is identified in terms of both the product market and the geographic market. In this regard, the FTC's decision in the famous GraceKennedy Remittance Services case provides guidance. According to that decision, the "relevant product market defines the product boundaries within which competition meaningfully exists and includes only those products that are 'reasonably interchangeable' by consumers for the same purpose." The geographic market is the "area of effective competition' in which the seller operates and to which the purchaser can practicably turn for supplies."

The next step in assessing an abuse of dominance is assessing actual dominance. Legally speaking, under the Act, an enterprise holds a dominant position in the relevant market if by itself or together with an interconnected company, it occupies such a position of economic strength as will enable it to operate in the market without effective constraints from its competitors or potential competitors. In practical economic terms, this step entails an analysis of market share and entry barriers.

Since nothing in the Act prohibits the mere existence of dominance, the next crucial step is determining whether this dominance has been abused and further, whether this abuse has lead to the substantial lessening of competition in the relevant market. In this regard, the Act provides guidance on what does and does not constitute an abuse of dominance.

An example of an abuse of dominance outlined in the Act is preventing any person from engaging in competitive conduct or eliminating any person in the market. On the other hand, an enterprise will not be treated as abusing a dominant position if it is shown that its behaviour was exclusively directed to improving the production or distribution of goods or to promoting technical or economic progress. For this reason, the last step in the assessment of abuse is an analysis of the pro-competitive benefits of the behaviour in question. It must always be borne in mind that an abuse of dominance must have the effect of substantially lessening competition to trigger action from the FTC. In fact, the Act dictates that, when assessing the effects on competition, the FTC must consider whether the practice is a result of superior competitive performance.

In terms of enforcement provisions, if the Court is satisfied on an application by the FTC that a person has breached certain provisions of the Act, the Court may order the payment of a penalty or grant an injunction. Such persons may also be liable in damages for any loss caused to any other person.

While the above-mentioned provisions are important, the competition regime could arguably be strengthened by giving the FTC the power of pre-emptive action that comes with the merger review and approval processes. This is not to say that all mergers are necessarily bad. Rather, merger review simply allows the relevant body to challenge mergers that are likely to substantially lessen competition.

Malene Alleyne is an Associate at Myers, Fletcher & Gordon and is a member of the firm's Commercial and Property Departments. She may be contacted via malene.alleyne@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.

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Keeping the playing field level