Competition law guide for start-ups

Any time competitors work together, there are enhanced risks of breaching competition law. While co-operation agreements can generate efficiencies, allow businesses to share risk, save costs and pool know-how, they can be considered anticompetitive if they remove uncertainty in respect of competitor conduct, facilitate collusion between competitors, or stifle competition in the market. 

Competition authorities are concerned in particular about co-operation agreements which ultimately harm consumers by way of decreased price competition, limited production, or which result in the restriction of progress in respect of innovation or technological development. 

Common examples of co-operation agreements include: 

• Joint venture agreements 
• Joint R&D agreements 
• Production agreements 
• Joint purchasing agreements 
• Commercialisation agreements 
• Standardisation agreements 
• Sustainability agreements 

Anticompetitive consequences of co-operation agreements may include: 

• Fixing purchase or selling prices, or other conditions of trade 
• Limiting or controlling production, markets, technological developments or investment 
• Dividing markets or sources of supply

While businesses often combine R&D efforts in an attempt to create synergies, R&D cooperation can sometimes inadvertently result in a breach of competition law. This can occur when the R&D cooperation results in broader collusion on the market or results in other anticompetitive effects. 

Competition authorities are often concerned that R&D agreements can extend to coordination outside of the scope of the cooperation agreement itself. For example, where parties to an R&D agreement cooperate in respect of their broader commercial or pricing strategies, this form of cooperation strays beyond the permitted parameters of the R&D agreement, into anticompetitive collusion. 

Anticompetitive effects can also occur if competition in respect of innovation is considerably reduced as a result of the collaboration, for example by restricting the need for each party to actively compete with each other in innovating new products. In the context of joint R&D, businesses may also agree to restrict supply or quality (a severe breach of competition law) in order to drive profits and cut costs. 

R&D agreements which result in anticompetitive effects, such as reducing price competition or competition in innovating new products, will likely breach competition law. 

Examples of low-risk R&D agreements include: 

• R&D agreements between non-competitors 
• R&D agreements between businesses that would not be able to carry out the required R&D independently due to limited technical capabilities or restricted access to skilled workers, finance or other resources 
• Outsourcing agreements under which the R&D is to be undertaken by research institutions or academic bodies, which will not be active in exploiting the results 

Information exchange between potential or actual competitors can present considerable risk under competition law. Certain kinds of information exchange, such as the sharing of current and future pricing information, will almost always be considered a serious breach of competition law. 

However, the sharing of any type of commercially sensitive information that reduces competitive uncertainty between competitors is likely to breach competition law. Whether the exchange of such information will breach competition law is highly fact specific, but generally turns on whether the information: 

• Reduces uncertainty; or 
• Facilitates collusion; or 
• Softens competition 

Anticompetitive information exchange can occur through direct exchange between competitors, or indirect exchange through a third party e.g. an online platform or database, or a trade association. 

Companies should be particularly careful of inadvertently exchanging commercially sensitive information in the context of cooperation or joint R&D ventures.

Some examples of commercially sensitive information that should generally not be shared include current, recent or future: 

• Pricing information 
• Production plans 
• Market strategies 
• Customer information 
• Production capacity 

Information that is historic, aggregated and anonymised, or publicly available is less likely to cause concern. 

Exclusivity clauses are usually found within agreements between businesses at different levels of the supply chain, for example between a manufacturer and distributor, or a distributor and retailer. 

Exclusivity clauses will often state that a distributor or retailer may only stock or distribute products from a particular supplier (or source a very high percentage of products) from a particular supplier, preventing the supplier's competitors from entering into any supply agreements with that distributor or retailer. 

For such agreements to breach competition law, they must have anticompetitive effects. These can occur when the party who grants the exclusivity (Party A) has a high market share. In those circumstances, Party B would benefit from the reduced competition from its competitors by effectively limiting their access to the market. 

A detrimental effect on competition law is also more likely if there are high barriers to entry at the buyer or supplier levels of the supply chain, for example due to the resources required to compete. 

Agreeing not to compete in respect of the following categories will inevitably breach competition law: 

• Particular customers 
• Specific territories 

Significantly, the above behaviour will also be classified as a "cartel" and invoke the most onerous legal consequences under competition law. 

Additionally, a non-compete agreement which includes a payment to a competitor to delay the launch of a competing product is also regarded as a particularly severe breach.

Companies appointing distributors or licensees will need to be aware of the rules regarding exclusive and selective distribution under UK and EU competition law. 

In particular, there are a number of rules surrounding the ability of companies to restrict active and passive sales ⁴ by members of their distribution/licensing system into certain territories, customer groups, or sales channels (such as the internet). 

For example, a restriction on passive sales⁴ between EU member states is highly likely to breach competition law. Restrictions on active sales however may be permitted within limited circumstances. For example, a restriction on active sales into a geographical area or to a customer group reserved to an exclusive distributor (or up to five exclusive distributors to that area/customer group) may be regarded as legitimate.

Examples of restrictions on active and passive sales which are likely to breach competition law include: 

• Prohibiting a distributor from actively selling into a territory which is not subject to a legitimate exclusive distribution agreement 
• A total prohibition of online sales to customers, or preventing the effective use of the internet by a buyer or its customers to sell goods or services 
• Restrictions on a distributor's ability to effectively use online advertising channels, or to bid on certain Google ad words. 

Breach of Chapter I Competition Act 1998 (agreements that have as their object or effect the restriction, prevention, or distortion of competition within the UK) 

Breach of Chapter II (abuse of dominance) 

AI and algorithms are increasingly rising in the agendas of competition authorities globally as a prominent concern. There is considerable risk of inadvertently facilitating anticompetitive behaviour, particularly collusion, by virtue of algorithms which track competitor data. 

Biases within AI also introduce scope for discriminatory practices which could breach competition law. For example, machine learning algorithms can lead to harmful outcomes when used by businesses (unwittingly or otherwise) to offer personalised or targeted pricing or other trading conditions that disadvantage a particular customer group. 

• Price tracking software may be used to police and enforce agreements in respect of price fixing 
• Algorithms can be used to personalise prices in a manner which is discriminatory 
• Algorithmic systems can result in exclusionary practices which include self-preferencing, or manipulating algorithms which rank businesses to exclude competitors 
• Generative AI algorithms may facilitate the sharing of sensitive commercial information or collusion between businesses on terms or business strategies