Commercial Agreements and Competition Law After The Enactment of Competition Act 2010

The Competition Act 2010 (“Act”) which came into force on 1 January 2012, has a significant impact on how businesses should carry out their daily activities so as not to infringe the various anti-competition prohibitions under the Act.

These anti-competition issues may arise from the day-to-day dealings with competitors, joint venture partners, manufacturers, wholesalers, suppliers, retailers, agents as well as customers, and will likely come under the scrutiny of competition authorities under the competition act.

The Act applies to any commercial activity by any enterprise (including Government-linked companies) within and outside Malaysia which affects competition in any market in Malaysia; save for those sectors exempted by the Act in Schedule 1 (namely the industries under the purview of the Communications and Multimedia Act 1998, the Energy Commission Act 2001, the Petroleum Development Act 1974 as well as the Petroleum Regulations 1974).

The regulator of the Act is the Malaysian Competition Commission (“MyCC”).

Anti-Competitive Agreement

Section 4 of the Act prohibits horizontal (enterprises operating at the same levels of the production or distribution chain, for e.g. competitors in the same market) and vertical (enterprises operating at the different levels of the production or distribution chain e.g. buyers and sellers at different stages of the production or distribution chain) agreements between enterprises where an agreement has the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services.

“Object”

Section 4(2) of the Act states that horizontal agreements which have the object of price-fixing, market sharing, limiting or controlling production, market outlets or market access, technical or technological development, investment, and bid rigging are deemed to have the object of significantly preventing, restricting, or distorting competition in any market for goods or services.

The MyCC will examine the actual common intentions of the parties to an agreement and also the aims pursued by the agreement in the light of the agreement’s economic context. If the “object” of an agreement is highly likely to have a significant anti-competitive effect, then the MyCC may find the agreement to have an anti-competitive “object”.

The significance of this is that once an anti-competitive “object” is discovered, the MyCC does not have to examine or prove that the horizontal agreement will have an anti-competitive “effect” on the market; the mere existence of the object is sufficient to establish liability.

“Effect”

However, where an agreement (whether a horizontal or vertical agreement) does not have an anti-competitive “object”, the MyCC may continue to examine the agreement to see if it has an anti-competitive “effect”. In considering the effect of an agreement, it is important to analyse the effect of the agreement on the existing market in its economic context.

In the absence of an anti-competitive object or effect, the agreement will fall outside the prohibitions under Section 4 of the Act.

Types of anti-competitive agreements

The MyCC has set out a non-exhaustive list of the types of agreements that may potentially be anti-competitive.

Horizontal agreements that facilitate information (price or non-price) sharing, that restrict advertising and standardise agreements to set new standards or to sell new products, or that serve as a barrier to new entrants to the market will be investigated.

Vertical agreements involving price restrictions such as setting minimum resale price maintenance, maximum price or recommended retail price which serves as a focal point for downstream collusion, may be anti-competitive, and the MyCC has made it clear that it will take a strong stance against these types of anti-competitive agreements.

As such, setting a floor price would likely be anti-competitive whilst a ceiling price would not be, unless it serves as a focal point for downstream collusion. Other non-price vertical agreements such as tying and bundling agreements that require a buyer to buy all or most of its supplies from the seller, exclusive distribution agreements covering a geographic territory, exclusive customer allocation agreements as well as up-front access payments conditions may give rise to anti-competition concerns

Saving the Agreement/Safe Harbour

If, after having examined the agreement, it is found to be anti-competitive, it is still possible that the agreement may be “saved” in the following instances:

(a) by establishing that the agreement does not significantly prevent, restrict or distort competition; The MyCC has indicated the following as a “safe harbour” if:

• the parties to the agreements are competitors (horizontal agreements) who are in the same market and their combined market share does not exceed 20%; or
• the parties to the agreement are not competitors (vertical agreements) and the market share held by each of the parties individually does not exceed 25%;

(b) by establishing that the agreement is entitled to the relief of liability under Section 5 of the Act;

In order to rely on this relief of liability, four conditions under Section 5 must be cumulatively satisfied, namely:

(i) there must be significant identifiable technological, efficiency or social benefits directly arising from the agreement;

(ii) the benefits could not reasonably have been provided by the parties to the agreement without the agreement having the effect of preventing, restricting or distorting competition;

iii) the detrimental effect of the agreement on competition is proportionate to the benefits provided; and

(iv) the agreement does not allow the enterprise concerned to eliminate competition completely in respect of a substantial part of the goods or services,

The burden lies on the parties to the agreement to prove that the benefits gained are passed on to their consumers. The parties may rely on Section 5 to obtain an individual exemption. It can be also used as a defence if they are investigated by the MyCC, or in a civil suit brought by a member of the public;

(c) by establishing whether the agreement might be eligible for exemption under an individual exemption; or

If all the conditions under Section 5 are satisfied, the parties may apply to the MyCC for an individual exemption under Section 6 of the Act. The individual exemption granted by the MyCC may be subject to conditions, obligations and/or for a limited duration. The exemption, once granted, is not permanent.

The MyCC has the power to cancel, vary, remove or impose additional conditions or obligations to the exemption if there has been a material change of circumstances, a condition or obligation has been breached or information submitted by the applicants for the exemption is false or misleading in a material particular;

(d) by establishing whether the agreement might be eligible for exemption under a block exemption.

The MyCC may, on an application by the parties, grant a block exemption under Section 8 of the Act to a particular category of agreements. An agreement which falls within a category of agreements specified in a block exemption is exempt from the prohibition under Section 4. Block exemption recognises the fact that certain agreements, although technically prohibited under Section 4, should be exempted as the pro-competitive effects of the agreements outweigh their anti-competitive effects.

Abuse of Dominant Position

Section 10 of the Act addresses the conduct of dominant enterprises.

The Act does not penalize an enterprise because of its dominance. It only prohibits enterprises from engaging in any conduct which amounts to an abuse of a dominant position such as imposing an unfair purchase or selling price; limiting or controlling production, market outlets or market access, refusing to supply; applying discriminatory conditions that discourage new market entry; engaging in predatory behavior towards competitors; or buying up scarce supplies in excess of the dominant enterprise’s own needs.

An enterprise will be dominant (whether as a supplier or a buyer) if it has significant market power in a relevant market to adjust prices or outputs or trading terms, without effective constraint from competitors or potential competitors in Malaysia. In general, the MyCC will consider a market share above 60% to be indicative that an enterprise is dominant.

However, market share alone is not conclusive as to whether that enterprise occupies, or does not occupy, a dominant position. For example, even if an enterprise has high market share, it would not be considered dominant if it is not in a position to increase price above the current level due to the possibility of new entrants or imports.

There are 2 main types of abuse:

a) exploitative conduct – set a high price to exploit consumers knowing that there are no new entrants or competitors, in which the resulting excessive profits are not a reward for innovation; and

(b) exclusionary conduct – a conduct that prevents equally efficient competitors from competing. For example, predatory pricing, price discrimination, exclusive dealing, loyalty rebates and discounts, refusal to supply and sharing of essential facilities, buying up scarce intermediate goods or resources as well as bundling and tying.

Leniency regime

Enterprise that admits its involvement in an infringement of any prohibition under Section 4(2) of the Act and provides information or other form of co-operation to the MyCC which significantly assisted in the identification or investigation of any finding of an infringement of any prohibition by any other enterprises will enjoy a reduction of up to a maximum of 100% of any penalties which would otherwise have been imposed on it.

Consequences of Infringement

Enterprises which are found to have infringed the Competition Act may be ordered to stop the infringement immediately, take steps to bring the infringement to an end and are liable to a fine of up to 10% of their worldwide turnover for the period during which the infringement occurred.

The enterprise may also be required to change its business practices in a manner materially adverse to its present business model. Directors, CEOs, COOs and managers may also be severally and jointly liable to pay hefty fines and subject to imprisonment.

Any private individual who has suffered loss or damage as a result of the infringement may also bring a private action against the enterprise.

A private action could potentially result in an award of damages that far exceeds the amount of the fine imposed by the MyCC. It should also be noted that a private action can be taken even if the MyCC does not investigate or prosecute the enterprise, or if the MyCC finds in favour of the enterprise after its investigations.

Aside from these potential sanctions, a breach of the Act will also result in additional consequences for the business as it will take up a huge amount of management and staff time in assisting with the investigation which could take years to complete. It will also attract negative publicity for the enterprise and damage the enterprise’s image and brand.

About the author:

This article was written by Edwin Lee Yong Cieh, Partner of LPP Law – law firm in Kuala Lumpur, Malaysia (+6016 928 6130, [email protected]). Feel free to contact him if you have any queries.

This article was first published in CHIP Magazine Malaysia.

The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.