HC Deb 08 July 1998 vol 315 cc1185-95
Mr. Lansley

I beg to move amendment No. 41, in page 26, line 4, at beginning insert 'Subject to subsection (1A)'.

Mr. Deputy Speaker

With this, it will be convenient to discuss the following amendments: No. 53, in page 26, line 4, leave out 'The Secretary of State may by order provide' and insert 'The Director may recommend that the Secretary of State by order provides'. No. 54, in page 26, line 4, leave out 'Secretary of State' and insert 'Director'.

No. 42, in page 26, line 8, at end insert— '(1A) Subject to subsection (1B), the Chapter I prohibition does not apply to a vertical agreement. (1B) If the Director is satisfied that there is a vertical agreement which, but for the exemption in subsection (1A) would infringe the Chapter I prohibition, he may issue a notice to each of the parties to the agreement bringing that exemption to an end in relation to that agreement on the date specified in that notice.'. No. 55, in page 26, line 14, leave out from beginning to 'is' in line 15 and insert 'The Director shall have power to give directions that an exclusion, exemption or modification made under subsection 1'. No. 57, in page 26, line 15, leave out 'in prescribed circumstances'.

No. 58, in page 26, line 17, at end insert 'or category of agreement.'.

No. 56, in page 26, line 17, at end insert— '(3A) Prior to making an order in relation to vertical agreements under subsection (1) the Secretary of State shall carry out and publish an assessment of the benefits to consumers of such an order.'. No. 43, in page 26, line 21, at beginning insert "'connected" and'.

No. 44, in page 26, line 21, leave out 'and "vertical agreement" have' and insert 'has'.

No. 45, in page 26, line 23, at end insert— '"price fixing agreement" means an agreement which seeks to control the price charged for the goods or services which are the subject of that agreement, whether or not by purporting—

  1. (a) to fix a particular price, a minimum price or a price band, or
  2. (b) to impose a requirement, make a recommendation or offer an incentive,
other than an agency agreement under which the principal establishes the price at which the agent sells the goods or services which are the subject of the agreement or an agreement which relates exclusively to the price of an interest in land.

"vertical agreement" means an agreement between two or more undertakings (other than connected undertakings) under which one undertaking acts as purchaser and another acts as supplier of the goods or services which are the subject of that agreement and includes an agency or distribution agreement but does not include a price fixing agreement.'.

Mr. Lansley

The amendments are designed to clarify the characteristics of vertical agreements and to restructure the clause to give effect to the Government's apparent intentions. I think that it is common ground on both sides of the House that, like any other aspect of the activity, one has to judge whether the impact of vertical agreements on competition and consumer benefits is beneficial. Whereas one would judge many other classes of agreement simply on their effects, there is more of a presumption that vertical agreements are benign, and the President of the Board of Trade stated earlier that she would try to find a mechanism by which such agreements could be excluded from the scope of the prohibition.

10.45 pm

The difficulty is that, throughout the passage of the Bill, we have been waiting for the Government to tell us by what means they propose to exclude vertical agreements. We have been awaiting the views of the task force established between the Government, the Confederation of British Industry and other bodies to look into the matter. In Committee, we were told that there was a further reason for delay because we had to take on board the Commission's final view of the matter. When we began to understand the thinking behind the Commission's approach, there was all the more reason to amend the legislation so that the House could lead the Commission to an appropriate definition of vertical agreements, rather than simply wait for what it would tell us.

I will not dwell on all the other incidental matters, but, for me, what gave rise to most concern in Committee was the Under-Secretary of State making it clear that the Commission was considering a definition of vertical agreements that would encompass operations at different economic levels. Rather, therefore, than having an effects-based approach, we would have a narrow, form-based approach to the exclusion for vertical agreements. It seemed an unhappy precedent for the Commission to go down that path as it would be perfectly possible to define such agreements differently. Indeed, the purpose of the amendments is to undertake that definition. For example, price-fixing agreements will clearly be excluded from the vertical agreements that should obtain the benefit of exclusion from the prohibition; one amendment would achieve that.

Clearly, there must be a proper clawback provision. If the director feels that a vertical agreement that has the benefit of the exclusion would infringe the prohibition, he must have the right to take that agreement back under the terms of the prohibition. All that is set out in the amendments, including the requirement that vertical agreements should relate to two or more unconnected undertakings.

There are a number of benefits, on which I will not dwell at great length as they were set out well in Committee. However, it is important to recognise that, the vertical agreements that the Commission seems to be moving towards are necessarily those that operate at different economic levels, whereas those that we meet in practice often have horizontal aspects. One instance weighs heavily on my thinking and that is that, where a franchise agreement forms the vertical agreement, the franchise holder will often have a small number of units in his own control at a particular level to protect the brand, demonstrate the franchise and show how the agreement should be manifested. The sort of definition that the Commission is considering would exclude such vertical agreements. We do not have the benefit of its final document, so it is not clear how it will disinter such an agreement to separate out the vertical and horizontal aspects.

If Ministers intend, as they stated at the outset, to provide an exclusion for vertical agreements, we should give effect to that provision, but with suitable safeguards and definitions. The amendments pick up on those points and would give effect to them. In contrast to their stated intention to exclude vertical agreements, all that Ministers have come up with—in months—is a bold enabling power, with no specifics. Nor have they, as yet, given us any clear definition of the terms on which they would be likely to produce statutory instruments to give effect to their intentions.

The amendments have two purposes. They challenge Ministers to tell us, even at this late stage, the basis on which they propose to handle vertical agreements, and they ask the Government to incorporate in the Bill an exclusion and subsequent definitions of the kind they ought to have proposed in the first place.

Mr. Chidgey

Amendments Nos. 53 to 58 attempt to address concerns raised in parts of the British music industry. Vertical agreements are vital to the industry, particularly for songwriters, composers, music publishers, record companies and collecting societies. The success of the music business depends on its ability to license musical works effectively and efficiently to parties who wish to use them. The important point is the variety of agreements concerned, and I hope that the Minister can clarify the position.

One-off agreements may allow use of a piece of music in specific circumstances, such as for television advertisements. Agreements may comprise collective licences, allowing frequent music users, such as television or satellite broadcasters, to play a licence holder's repertoire without seeking authorisation for each composition. Vertical agreements concerning copyright are different from other vertical agreements, for several reasons. Unlike transactions involving other types of property, copyright licences do not transfer ownership from one party to another. They merely give permission for use of copyright work. It is right that such agreements should specify the circumstances in which the licensee is permitted to use the work. Anything else would render rights worthless.

European Commission case law already recognises that intellectual property contracts must contain conditions of use. Regardless of specific terms and conditions, licences grant freedom to those who wish to use music. Should the Bill result in uncertainty for rights holders about whether licence agreements are valid, they may choose not to enter into such agreements rather than risk losing control of their work, the source of their income. Members of British Music Rights, songwriters, composers and music publishers need certainty in their business relationships. We want the Government to assure rights holders that they do not consider agreements to be restrictive, and that the Director General of Fair Trading will not regard agreements as falling within the Bill's scope.

The National Consumer Council is concerned about clause 50. A balance needs to be struck between ensuring that the Office of Fair Trading is not overwhelmed by dealing with vertical agreements, and making sure that the director general has adequate powers to act against malign vertical agreements. The NCC feels that that balance is not struck sufficiently in favour of consumers. Broadly, we are concerned that the powers will not be sufficiently robust to deal with vertical agreements and anxious about the use of the clawback power in clause 50(3), which is the key to protecting consumers from malign agreements. We are worried that, unless the director general has sufficient powers to consider all vertical agreements that have been exempted or excluded, the provision will fail.

Our amendments are designed to probe the operation of clause 50. The purpose of amendments Nos. 53 and 54 is to probe why it should be the Secretary of State who makes the relevant order. Why should it not be the director general, or even the Secretary of State on the advice of the director general? Will the director general have any role in making the order?

Those questions have been raised in the context of the other powers in the Bill, particularly the Secretary of State's exclusion powers in clause 3, the director general's power to make individual exemptions under clause 4 and the block exemptions under clause 6 that may be made by the Secretary of State at the director general's recommendation. In clauses 3, 4, and 6, there is a clear distinction between the roles of the Secretary of State and the director general, but it has been lost in clause 50.

In the past, the National Consumer Council has feared that there has been too much scope for unfettered Executive action on competition policy. The director general should have the final say on competition issues while the Secretary of State should have it when broader economic issues must be considered. Clause 50 confuses that distinction. We look to the Minister for clarity.

Amendment No. 56 provides that, before making an order, the Secretary of State should justify why vertical agreements should be excluded or exempted from the prohibition. In doing so, he should assess the benefits to consumers of the order. The assessment should be published as part of the consultation process. That should make the process of making the order as open and accountable as possible.

Openness is important because clause 50(1) does not specify the criteria for making exclusions or exemptions. The situation in the Bill is different from what has been proposed in the European Union document, "Draft communication on the application of the EC competition rules to vertical restraints". The EU proposals, by comparison, are based largely on market share triggering the blacklisting of prescribed practices.

The main thrust of amendments Nos. 55, 57 and 58 is to ensure that the director general's clawback power is not too limited. As currently drafted, clause 50 means that the order will have to specify whether the director general has such a power or not. We believe that he should be able to use it whenever he considers it appropriate and not only when specified in the Secretary of State's order. The worst case scenario is that the Secretary of State could exclude or exempt all vertical agreements under clause 50(1) without empowering the director general to use any clawback power at all. Should that happen, no vertical agreement would be exposed to competition scrutiny. That would be unacceptable and we do not believe that that is the meaning of the legislation.

Amendment No. 57 would ensure that the director general does not have to be too constrained in his use of the clawback power. Clause 50(3) limits the use of the power to "prescribed circumstances". What are the prescribed circumstances likely to be? If such circumstances were confined to a merger inquiry identifying problems, it would be far too restrictive. The director general should have the power to consider any vertical agreement brought to his attention as being potentially malign. He should then be able to assess it, judge its anti-competitive effects and, if necessary, use the clawback power under clause 50(3) to bring it within the chapter I prohibition.

I have set out as clearly as I can our concerns about clause 50 by tabling probing amendments and providing background information on the specific concerns of the National Consumer Council and of the music rights fraternity, in particular British Music Rights. I expect the Minister to address the issues seriously and I hope that he will give some words of encouragement when he winds up the debate.

11 pm

Mr. Letwin

I should begin by reassuring hon. Members that I do not intend to dwell on this matter at the length at which I dwelt on a previous matter this evening.

Clearly, at some point after I found myself dislodged from the Committee, my hon. Friends had an attack of extreme moderation, for they have tabled amendments that are minimalist. From an early stage in the Bill's progress, we were assured by the Secretary of State that action of a firm and decisive nature would be taken to remove vertical agreements from the scope of the Bill. We were assured repeatedly throughout the Committee stage—I have checked the Official Report of the later part of the Committee's proceedings—that we would be given a judgment of Solomon, if not something better, on the issue as a result of the prolonged deliberations of the Government and their chosen parties that would tell us exactly how that would be done.

Yet what do we find? We find provisions in the Bill that are simply a replication of the Government's general tendency to insert clauses that either are, or bear a striking resemblance to, Henry VIII clauses—clauses that give the widest possible discretion under regulation. My hon. Friends have tabled amendments that would make provisions that might be described as presumptive—they would still allow a considerable degree of discretion. The Minister owes it to the House to explain how he intends to use clause 50 as it stands; and why he would not be prepared to accept amendments that slightly constrain that regulation-making power.

I shall go further, because there is a point here that connects with proceedings earlier this evening. If my hon. Friend the Member for South Cambridgeshire (Mr. Lansley) is right and the reason why the Government have wholly failed to bring forward a clear and concrete definition of the sorts of vertical agreement that will be exempt and those that will not is that they await the views of the Commission on the matter, the Government are once again guilty of entirely failing to distinguish between interstate and intrastate commerce. The views of the Commission on this matter are of exactly the same academic interest as might be the views of a range of economists: if the Commission has superior economists, its views are of greater interest; if inferior, as is all too often the case, its views are of less interest. The Commission has no jurisdictional interest whatever in this matter. As we have been repeatedly assured, it is precisely the purport of the Bill to deal with intrastate commerce. In such matters, the Government cannot hide behind the views of the Commission.

Therefore, we have before us the straightforward spectacle of the Government having spent many months considering an issue only to bring before the House something that they could perfectly well have brought before the House six months ago—provisions that enable the Government to decide in due time what the Government want to do. I would venture to say that my hon. Friend the Member for Daventry (Mr. Boswell) could have drafted such provisions immediately—indeed, his research assistant or secretary could have done so.

The clauses tell us nothing, so, if the Minister intends to reject the amendments, he owes it to the House to tell us exactly why he is doing so. He owes it to the House to tell us how he will go about exercising the wide latitude given to him; and why he would not be able to exercise sufficient latitude if he accepted the amendments tabled by my hon. Friend the Member for South Cambridgeshire. If the Minister cannot give that explanation, we owe it to the country to explain that this is yet another case in which the Government intend to abrogate responsibility over intrastate trade to an external power that ought not to have jurisdiction in that matter.

Mr. Ian McCartney

The issue of vertical agreements was considered at length in Committee. Clause 50 was added to the Bill at that stage to allow additional flexibility in the treatment of vertical agreements. Since that time, the CBI has written to hon. Members—and specifically to members of the Committee. The letter was dated 7 July. I shall quote the CBI's views on the clause added in Committee. The letter states: The Government amended the Bill at Standing Committee to allow for an exclusion to be brought in at a later stage—the CBI supported this. The CBI supports the position the Government have taken in respect of these matters.

Mr. Ian Bruce

Will the Minister give way?

Mr. McCartney

On that specific point?

Mr. Bruce

Yes. I had intended to make a speech, but an intervention is simpler. I sat through the debate on Second Reading and tried to find out from the Government what they were trying to achieve with the Bill. Can the Minister give us one or two examples of cases in which he feels that vertical agreements are not working and tell us what the Government intend to do about it so that we can judge whether the clauses will do what they intend?

Mr. McCartney

With all due respect, we are trying to achieve a fair and effective competition regime, which includes the capacity to exclude vertical agreements. The vast majority of vertical agreements are benign, but there are circumstances in which a vertical agreement may not be benign. We must have provisions in place to deal with that. That is why the Government, after discussion with interested parties, came forward with clause 50. I repeat that that is why the CBI went out of its way to write to hon. Members saying that it supports the way in which the Government are proceeding.

Mr. Chidgey

The Minister is quoting a letter from the CBI, dated 7 July, which, as he rightly said, has been circulated to members of the Committee and others. The hon. Gentleman has given the House the impression—I am sure he did not mean to—that the letter contains a complete endorsement of the Bill. The Minister knows that it does not. There are seven points in the letter which express the concerns that the CBI still has. I am not saying that I agree with those concerns, but it is only right and proper that the record should show that, although the CBI welcomes the Bill in principle, it does still have seven specific concerns.

Mr. McCartney

With all due respect, I thought that I had made it absolutely clear that I quoted the CBI's view of what has happened on vertical agreements since the Committee stage. I quoted it accurately. I made no attempt, either generally or specifically, to attribute to the CBI any other remark—nor would I attempt to do so. I was trying to be helpful to the House. I have been dealing specifically with the issue around clause 50. I did that because that clause came about as a result of the consultations that took place. I believe that it was legitimate for me to quote the CBI's view. I assume that the CBI sent that note to hon. Members so that they could be clear about the process involved in achieving clause 50.

Mr. Letwin


Mr. McCartney

I cannot think for a moment what the hon. Gentleman wants to add to that. Perhaps he will wait until I get a little further into the body of my speech.

We have said on a number of occasions that we believe that there is significant merit in recognising the special features of vertical agreements as a whole under the chapter I prohibition. The prevailing view among economists is that vertical agreements do not normally give rise to competition concerns, except where one of the parties holds market power or there exists a large network of agreements. In recognition of that, using the powers under clause 50 will reduce the burden on business of unnecessary notification. That will enable the better concentration of regulatory resources on areas of competition concern.

As hon. Members may be aware, the European Commission has been conducting a review of the treatment of vertical restraints. Papers that we have received recently from the Commission contain possible definitions of vertical agreements which could form the basis of a description for the purposes of the chapter I prohibition.

There is, of course, great merit in using the same language as proposed by the Commission, if possible. Many UK businesses are already subject to EC competition law and it might be burdensome to apply two different tests at EC and UK level when deciding how they will fall to be treated under the UK and EC prohibitions. This is a matter we are actively considering with the vertical agreements task force, which includes representatives from the CBI, the Monopolies and Mergers Commission and the Office of Fair Trading.

Nevertheless, we recognise that some vertical agreements can cause serious competition concerns that might not be readily dealt with by reliance on the chapter II prohibition or the complex monopoly provisions of the Fair Trading Act. Clever lawyers—there are a few in the House—may also test the terms of the special treatment and squeeze agreements within it which were not intended to benefit. In particular, we do not propose to give special treatment to price-fixing vertical agreements.

It is essential that the director general is able to claw back individual agreements to examine them. That is a quid pro quo of a wide-ranging exclusion.

We have discussed our approach in detail with representatives of the CBI and it has their support, as I noted earlier when I quoted the body's parliamentary briefing.

I turn now to the specific amendments proposed by the hon. Member for South Cambridgeshire (Mr. Lansley). True to his tradition, he spoke to them in a reasonable and cogent manner. That sounds trite, but he understands what I mean. The definition suggested in amendment No. 45 for a vertical agreement is at odds with that suggested by the European Commission in its papers. As I have said, businesses may find it burdensome to have two different tests that they have to apply. Our approach in this area, as in many others, is to assist businesses by introducing a prohibition that is consistent with article 85.

Mr. Letwin

I want to press the Minister on the point about the CBI. Opposition Members entirely accept that the CBI prefers the current position to the original position, in which vertical agreements might have been entirely prohibited. Does the Minister not accept that, if the CBI was offered the alternative of total or possible total prohibition, compared to what is currently in the Bill, it would be very likely to favour the latter? He has not addressed the question whether it might favour over that the amendments in the name of my hon. Friend the Member for South Cambridgeshire (Mr. Lansley).

Mr. McCartney

I cannot say what the CBI thinks about the amendments. I suppose that, having read them, it decided to say in its briefing that it agreed with the Government's position on the matter, which would indicate that, on reflection and consideration, and after discussions with others who are stakeholders, it believes that the Government's proposal is the best way forward. If that was not the CBI's view, it would have told hon. Members so in no uncertain terms in its note to us, because this issue is as important to the CBI and its members as it is to other businesses.

Even without the objection that I described, I am concerned that the definition provided in the amendment may allow anti-competitive horizontal agreements to slip through by masquerading as vertical agreements. For example, two parties at the same level of trade could enter into reciprocal agreements for the supply of a particular good, setting conditions that relate to the supply of the good to consumers.

The amendments do not allow flexibility to amend the definition of vertical agreements over time. That is the key difference between the Government's approach and that of the hon. Member for South Cambridgeshire.

Amendment No. 45 would limit our ability to make adjustments to ensure consistency with the European regime. It would also preclude amendments to the definition if it proved to be defective. Some flexibility of that nature is desirable to ensure that special treatment remains of real value to businesses but does not open a loophole in the operation of the prohibition. Hence, clause 50 allows the special treatment to be altered, but only by affirmative resolution.

Mr. Lansley

I acknowledge that the route that I suggest might lead, in the initial stages, to a contest between a definition derived here and one proposed by the Commission. I want to tax the Minister on whether he believes that the definition towards which the Commission is moving is one with which he is content. Is it acceptable for the Commission to have a definition that includes operating on different economic levels, since that is more about form than effect and may have a significant adverse effect for franchise holders?

Mr. Deputy Speaker (Mr. Michael J. Martin)


Mr. McCartney

Thank you, Mr. Deputy Speaker. You call me that because we have known each other since childhood—I was the child.

I would not have prefaced my remarks on the necessity to provide the opportunity in clause 50 to use the wording of the Commission's proposals as I did if the Government were unhappy or thought that the proposals would not work as we want them to. The fact that we are rejecting the hon. Gentleman's amendments means that, as I have said, we believe that the proposals from discussions in Europe will meet the objectives of the Government and business for vertical agreements. I understand that the hon. Gentleman will not accept that. Although I understand his reasons, there is a genuine disagreement between us. I hope that the judgment that I am making will prove to be correct. I spent a great deal of time discussing it with the CBI and others, to ensure that the decisions that we took, in relation to the principle of clause 50 and in relation to what comes out of it, genuinely met the requirements of business. There would be no point in the Government dealing with the matter in any other way.

The amendments proposed by the hon. Member for Eastleigh (Mr. Chidgey) tackle the issue of vertical agreements from a different perspective. Amendments Nos. 53 and 54 give the Director General of Fair Trading a role in the making of an order for vertical agreements. Amendment No. 58 also gives the director general power in relation to the scope of the prohibition, allowing him to remove the benefits of an order from a category of agreements.

11.15 pm

As my hon. Friend the Minister for Competition and Consumer Affairs said in Committee, where a power extends to the scope of the prohibition, it is right that it be subject to affirmative resolution of both Houses of Parliament. Equally, it is right that a Minister, rather than the director general, is responsible for making orders.

Amendments Nos. 55 and 57 would both give the director general an ability to exercise clawback whenever he wishes to do so. As we have said, we think it right that the director general be able to exercise clawback, but only when he considers that an agreement would, if clawed back, infringe the chapter I prohibition, and that he would not be likely to grant it an unconditional exemption. That test will allow him to exercise clawback when an agreement is seriously anti-competitive, while giving businesses that enter into benign vertical agreements the proper certainty that they require.

By removing a test for clawback, the amendments could undermine the purpose of clause 50. If businesses are not given reasonable confidence that there is an appropriately high threshold before clawback, they may well seek to notify benign vertical agreements that are covered by an order to obtain that greater certainty.

I fully accept the sentiment that gave rise to amendment No. 56, but do not view it as necessary. We intend to consult widely with consumer groups, such as the National Consumer Council, as well as business before making an order under clause 50.

The hon. Member for Eastleigh raised the issue of intellectual property. We do not believe that there is a need to cover such agreements in the special treatment proposed. The licensing of intellectual property rights has been subject to article 85 in the United Kingdom for more than 25 years, and a licence to use intellectual property rights as such is not restrictive; it is granting a freedom. Other copyright issues are covered by the Copyright, Designs and Patents Act 1988 and recent European Community directives. I shall send the hon. Gentleman copies of the recent directive, because discussions of it took place upstairs. I do not think that the hon. Member for Daventry (Mr. Boswell) had quite joined the DTI team from the Treasury at the time—one of his hon. Friends dealt with it—so, if that would helpful, I shall send the hon. Gentleman a copy too, so that both Front-Bench Teams are aware of the position.

Let me return to amendment No. 56. The Department would expect as a matter of course to conduct an assessment of the costs and benefits for all legislation—primary or secondary. That assessment is placed in the Library when legislation is introduced to Parliament. In addition, my right hon. Friend the Chancellor of the Duchy of Lancaster has undertaken to issue guidance requiring Government Departments to publish such an assessment when a proposal is consulted on. That new guidance is likely to be in place by September this year.

On that basis, I invite the hon. Members for South Cambridgeshire and for Eastleigh not to press their amendments.

Mr. Lansley

I am grateful to the Minister for the manner in which he responded, although I feel that on this occasion—although not in some of our earlier debates—the substance was not sufficient. It is like trying to grasp a hologram; one looks for the Government's proposals on vertical agreements, and they are just not there.

I am prepared to accept that the objective should be to arrive at a definition of vertical agreements which is workable, consistent and aligned between ourselves and the European Commission, and which, as the CBI proposes, should presume that vertical agreements are excluded in the vast majority of cases with appropriate clawback and definitions. The proposed amendments do that.

The difference between Conservative Members and the Minister is that we feel that we should be leading the Commission to an appropriate definition, not simply resting upon the proposition that the Commission will, in due course, come up with a definition. Judging by the first accounts that have been presented to us in Committee and in the Chamber tonight, I believe that there may be practical difficulties with the definition when the time comes. Rather than resting on the proposition that flexibility is all and that we must go with the Commission when the moment arrives, it would be better to legislate rationally and in accordance with our objectives, and to press the Commission to come on board. However, I appreciate that the Minister was trying to respond helpfully and, as I understood him, he was not rejecting the definitions in the amendments so much as trying to see whether in due course some of those thoughts about price fixing and so on could be taken on board. On that basis I see no purpose in pressing the amendment. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 11, in page 26, leave out lines 24 and 25.—[Mr. Ian McCartney.]

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