More than twenty years ago, the well-publicised EU and US antitrust cases involving Christie’s and Sotheby’s caused waves in the international art market. In this blog, we explain how today’s competition rules in the European Union and the United Kingdom operate and their potential implications for commercial practices across the art market.
What is competition law?
Key areas of enforcement: collusive collective and abusive unilateral behaviour
In essence, competition law – antitrust law in the US – has two principal objectives: first, to prohibit anti-competitive co-ordination by two or more businesses and secondly, to prevent misuse of market power (overt or disguised) by a single business or group of businesses that dominates a particular market. The ultimate aim is to ensure that competitors in a market have the opportunity to compete effectively, so that other parties and particularly consumers can obtain the best deal in the most efficient manner. The most frequent examples of infringing agreements between competitors include agreements to fix prices, to restrict the supply of products, to share out distribution territories or to restrict production or innovation in order to preserve market power in existing products. The penalties for anti-competitive agreements vary in severity, depending on whether the very object of the agreement is to harm competition, or its effect may be found by competition authorities to be harmful to competition (whether or not this was the intention of the parties).
Unilateral anti-competitive conduct notably includes excessive or predatory pricing, making a purchase dependant on the purchase of additional products, refusal to trade with selected competitors or customers or denial of an essential facility. These practices are called abuse of a dominant position in Europe, and monopolisation in the United States.
Infringements of competition law can attract fines of up to 10% of the business’s turnover for the previous year. In addition, in the UK, directors may face disqualification.
What are the relevant competition rules and who enforces them?
The relevant rules that prohibit cartels and other anti-competitive agreements are Article 101 of the Treaty on the Functioning of the European Union (TFEU) at the EU level and Chapter I of the Competition Act 1998 in the UK. Additionally, Article 102 TFEU and Chapter II of the Competition Act prohibit abuse of dominance.
The European Commission is the EU’s competition authority that applies and enforces compliance with Articles 101 and 102 of the TFEU in competition matters. In the UK, a range of regulators exercise powers in relation to competition, but the Competition and Markets Authority (CMA) is the country’s central and key competition enforcer.
In terms of jurisdictional division, the CMA investigates cases and initiates proceedings in domestic competition matters in the UK. If a case has an EU dimension, the European Commission will step in. In practice, a case involves an EU dimension if it concerns a ‘substantial’ part of trade between member states. What does that mean? The answer depends largely on the market concerned, but the anti-competitive effect of an agreement or practice in part of the territory of a single member state can be sufficiently substantial. If it is, it will be subject to the European Commission’s jurisdiction and application of Article 101 or 102 as appropriate. As of 1 January 2021, practices affecting territories of both the UK and the EU may be reviewed by both the CMA and the European Commission.
Separately, competitors, customers and consumers harmed by anti-competitive conduct can bring private claims for damages against offenders. Competition litigation is well-established particularly in the UK and US.
Practices that call for caution
The application of competition law in the art world has been most prominent in relation to auctions. In what remains the most significant antitrust case brought against art market participants to date, the European Commission and Department of Justice (DoJ), one of the antitrust agencies in the United States, pursued Christie’s and Sotheby’s for fixing the level of sellers’ commission. In offering their services to sellers, auction houses compete with one another on a range of factors. Fees charged to sellers, including the level of seller’s commission, rank amongst the most significant. The Commission and DoJ found that for a period of time, Christie’s and Sotheby’s agreed to apply a sliding-scale system of sellers’ commission that was non-negotiable. Holding approximately 90% combined market share by value in global auction sales, the two auction houses were, therefore, charging aligned prices without risking being undercut by each other.
Christie’s was first to disclose the anti-competitive agreement to both the DoJ and European Commission under their respective leniency programmes, and along with its officers avoided criminal prosecution in the United States and a fine in the EU. By contrast, Sotheby’s was handed a criminal fine of USD 45 million in the United States and a competition fine of over EUR 20 million in the EU, reduced from the initial amount exceeding EUR 41.5 million for confessing the conduct to the European Commission shortly after Christie’s had done so, and for providing assistance. In addition, in the United States, the then chairman of Sotheby’s was sentenced to one year in prison and a fine of USD 7.5 million and the then chairman of Christie’s was branded a “fugitive from justice” for refusing to meet charges against him in the US.
Bid-rigging at auction
Bid-rigging is another type of reprehensible anti-competitive conduct. It occurs when multiple bidders interested in a lot form an auction ring with the intention to acquire the lot at a lower price by not competing against one another. The members of the ring select one of them to bid on the lot while the other members either do not bid at all or deliberately submit low bids that do not jeopardise the select member’s bid. If the latter acquires the lot, the auction ring holds another, private auction – known as the ‘knock out’ – that takes place in secrecy and excludes outsiders. The ring members then divide among themselves the difference between the price fetched at the original auction and the private auction (‘pool split’).
In Europe, an auction ring formed by dealers specialising in 17th to 20th century paintings was uncovered in the Netherlands. In 2012, the Dutch competition authority found it anti-competitive. An example from across the pond in 1988 is the case of United States vs Pook where an auction ring led to the auctioneer incurring a criminal conviction and the revocation of the auctioneer’s license.
As we explained in another blog, however, the Dutch decision does not prevent joint bidding if parties comply with a set of requirements. According to the decision, a bidding “consortium” is permissible in the Netherlands if it registers with the auctioneer in advance of the auction and if parties commit not to sell the item(s) acquired at the auction to another registered bidder for six months.
Other countries, including the UK, also allow genuine joint bidding agreements so long as certain conditions are met. In practice, individual bidders may not be able financially to bid on a lot on their own. In such circumstances, joint bidding is, in fact, pro-competitive as it allows more bidders to enter the race and push the price higher.
For an extensive discussion of the English legal regime that applies to auction bidding, including the Auction (Bidding Agreements) Acts of 1927 and 1969 and the Enterprise Act 2002, see our previous blog.
Whilst bid-rigging is traditionally designed to artificially depress prices at auction, it is equally possible for a group of bidders to agree to artificially inflate prices at auction. For example, galleries could agree to support each other’s artists by bidding up works by those artists in order to ensure that prices of works by those artists remain above a certain level, thereby protecting the value of the stock they hold in those works. An agreement between galleries designed to inflate prices artificially would undermine the ability of collectors of those artists to acquire those works, and by reducing their affordability, undermine access by new collectors to those artists. This type of bid rigging has not been investigated by competition authorities, yet it is hardly a secret that galleries, especially those specialising in contemporary art, intervene in the auction process to ensure that the price of artworks by their artists remains at the “right” level. There is nothing wrong, of course, for a gallery to bid on a work by one of its artists. By contrast, an agreement between galleries to support each other’s artists in the auction room is questionable from a competition law perspective and open to scrutiny.
Online auction platforms
Between 2016 and 2017, the CMA investigated ATG Media, the largest provider of live online bidding services in the UK. Leading auction houses use the company’s platforms, including “The Saleroom.com”, to host live online auctions of fine art and antiques that bidders need not attend in person. The CMA found three features in agreements between ATG Media and auction houses particularly concerning: first, ATG Media induced auction houses into exclusive agreements by granting discounts so that the latter would not use platforms offered by ATG Media’s competitors. Second, where auction houses did use other platforms, ATG Media prevented them from charging bidders at other platforms lower bidding rates. Finally, under the terms of the arrangements, auction houses were unable to promote or advertise rival live online bidding platforms that were competing with ATG Media. The CMA was concerned that these practices harmed other online auction platforms, reduced choice and increased costs for auctions houses and ultimately resulted in higher costs for online bidders. Before the authority reached a decision, ATG Media offered to cease all controversial practices for five years, an offer accepted by the CMA. The CMA did not express a view on whether ATG Media had broken the law.
Collaboration between art businesses
What form of commercial cooperation complies with competition law and what does not?
In the previous section, we considered practices that have come under scrutiny. These examples show that practices involving multiple actors tend to be more common in the art world than unilateral conduct (although the investigation into ATG Media’s practices alluded to potential for abuse of dominance).
Hard-core restrictions of competition, particularly price fixing, partitioning of markets or stifling innovation are no-go areas, even if participants’ combined market share is tiny. While the CMA and other competition authorities may apply their resources to the cases likely to have the largest effect, enforcement is possible at all levels. Art businesses should exercise care in both direct contacts between one another and on knowledge-sharing platforms that seek to facilitate exchange of information.
Competition law does not impose a blanket prohibition on all forms of business cooperation. Collaboration between two or more businesses may not only be permissible but, in some cases, even desirable. The example of genuine joint bidding at auctions where individual bidders would otherwise not be able to bid is a benign case in point.
But there are many others. Think, for example, of last year’s joint venture called AGP, the acronym of Acquavella, Gagosian and Pace. The three galleries joined forces following the passing of financier and philanthropist Donald B. Marron in late 2019. AGP sold Mr Marron’s vast collection, valued at USD 450 million, a project of a size normally handled exclusively by leading auction houses. The galleries’ entry into the segment of the art market that has been fairly rigid in terms of structure and market shares for decades potentially broadens the choice for selling agents by offering more attractive rates than the established players. While AGP clearly adds value to mega collectors, galleries and dealers forming such partnerships must proceed cautiously when designing them. Arne Glimcher, the founder of Pace said that the joint venture was “… independent from our galleries”, which remain competitors for the most part. Indeed, under competition laws a joint venture must not, for example, offend competition between joint venture partners in respect of sourcing and selling art in the course of their ordinary business.
Occasionally, auction houses themselves may team up to make joint pitches to obtain larger or more diversified consignments. Depending on the facts, such an arrangement can be either pro-competitive or anti-competitive. If it results, for example, in lower fees charged to the client and enhanced services and quality (for example because a smaller auction house has specialised expertise in one area but cannot effectively sell the rest of the collection), then the collaboration may be pro-competitive. Similar collaboration might be at the request of a client who has a longstanding relationship with a local auction house but also wishes to access the longer reach of a larger competitor. A key consideration for the assessment of such agreements is the outcome for the client: are they getting a better deal as a result? Or are they, in fact, worse off due to exclusivity provisions and higher fees deriving from decreased competition arising from such agreements?
Exclusivity is an important aspect in commercial relationships between galleries and artists. It may allow the gallery to take greater commercial risks in promoting the artist, and to tailor their approach based on the artist’s particular requirements. At the same time, such a relationship should not impose unjustified restrictions on artists. The question is, therefore, at what point does the gallery-artist relationship move from beneficial to problematic? The answer will largely depend on the facts, particularly the parties’ relative bargaining positions. Furthermore, while a particular commercial arrangement may be perfectly compliant with competition law in one set of circumstances, it can offend it in another; this can be difficult to identify without specialist legal advice.
Exclusivity is at the heart of other types of commercial arrangements in the art market. Galleries, for example, sometimes require buyers in the primary market to offer an artwork back to them if they decide to sell it, as part of their representation of the artist. A similar example is an offer by some auction houses to provide free valuations, but only on the condition that if the client decides to sell, they must do so with that auction house (or alternatively, that valuation fees are rebated upon such sale). A different type of potentially infringing conduct is a refusal to deal with a customer, for example, because he or she is considered a difficult client or a bad payer. Such a refusal could be justified in some circumstances and not in others. A key element is likely to be whether there is an element of coordination, where the refusal to deal appears to be the result of agreement between competitors for their own benefit, rather than for an independently justifiable reason. Best advice in these types of cases is to ensure that such decisions are reached independently and are clearly documented as such.
The art market is a vibrant place characterised by interactions among participants. While sharing knowledge may be beneficial, art market participants must exercise caution when exchanging information. For example, art market trade associations should not serve as platforms for anti-competitive exchange of information or the forging of anti-competitive agreements, either between competitors themselves or competitors and the relevant trade association. Although we are not aware of prior examples in the art market, such behaviour has attracted the attention of competition authorities in other sectors in the past.
Other aspects of competition law to consider
Private claims for damages for infringement of competition law
- Auction houses: Competitors, customers or consumers affected by behaviour that violates competition laws can, in many jurisdictions, seek damages from the infringers. Following on from the US Department of Justice’s 2000 decision discussed in the previous sections, Sotheby’s and Christie’s faced class actions for civil claims, largely brought by sellers affected by the higher vendor’s fees. The auction houses settled these claims for USD 256 million each. These settlements, therefore, remind businesses that the greater financial damage often comes from private antitrust litigation rather than investigations and fines imposed by regulators, particularly in the US where class actions are an established vehicle for seeking redress.
- Museums in New York: Another example of an attempted private antitrust claim was a class action brought by artist Robert Cenedella in 2018 against five prominent museums in New York (the Metropolitan Museum of Art, Museum of Modern Art, New Museum of Contemporary Art, Solomon R. Guggenheim Foundation, and the Whitney Museum of American Art). Joined by other artists claiming to be similarly situated, Mr Cenedella argued that the five museums conspired to exhibit only a small, select circle of artists and to shut Cenedella out of the market for contemporary art in New York. The judge dismissed Cenedella’s case at an early stage for lack of evidence.
- Authentication boards: The role of an authentication board dedicated to a particular artist is principally the preservation of that artist’s legacy. To that end, these boards may be asked to evaluate the authenticity of works created, or alleged to have been created, by the artist concerned. The right “stamp” can drive the value of an artwork up to astronomical heights while a denial of authenticity typically renders it effectively worthless and, in extreme cases, may result in destruction of the work. Independent experts also offer authentication services. Legal claims against authenticators have become more commonplace. Claimants have frequently based their claims on allegations of negligence, defamation or fraud but in certain cases, competition law claims based upon an abuse of a dominant position are also possible.
By way of example of such claim against authenticators, Joe Simon-Whelan, an art collector, sued the Andy Warhol Art Authentication Board for denying the authenticity of a silkscreen self-portrait of Andy Warhol. Mr Simon-Whelan argued in court that the Board violated provisions of federal antitrust law, pleading both conspiracy and monopolisation (in the EU, the conduct could potentially amount to an abuse of dominant position under Article 102 of the TFEU). The parties ultimately settled the dispute so one is left speculating how the claimant’s antitrust claim would have fared in US courts. It should be noted that the claim had survived the Board’s motion to dismiss, suggesting that the theory was not wholly implausible. Similar cases have been brought in the United States against, for example, the Haring Foundation and Calder Foundation. To our knowledge, these cases have been unsuccessful. What claimants have achieved, however, is to persuade authentication boards to disband for fear of legal action and legal costs. In response to this trend, some jurisdictions like the US have sought to adopt laws protecting art authenticators.
Since the pandemic began, the Government has stepped in to support businesses. There are, of course, other good reasons for granting state aid, such as incentivisation of investors or job creation.
At the same time, state aid is one of the key areas of enforcement under EU competition rules. Subjecting state aid to EU competition laws is logical: in their absence, member states in the EU could, for example, favour national champions at the expense of other businesses from around the bloc. Accordingly, an aid measure, be it a direct grant, tax break or support in another form, is incompatible with the TFEU if it distorts or threatens to distort competition in the relevant market. As of 2021, the UK will screen state aids granted within its territories, although the detail of the new regime remains to be seen.
State aid is, however, unlikely to be problematic for the art sector in the EU because support measures for museums and other cultural organisations benefit from various exemptions under EU state aid laws. The UK may introduce similar exemptions in its new state aid regime.
The pandemic has prompted interesting models of collaboration in the art world
Following the cancellation of art fairs and exhibitions due to the coronavirus in 2020, various galleries consigned artworks to auction houses for online sales as an alternative. At the same time, the consigned works were also exhibited at the galleries. The auction houses’ platforms directed prospective buyers to the dealers’ bios, websites and emails, thereby offering levels of visibility that otherwise could have been lost.
The pandemic has nudged some, and forced others, to innovate and team up with other partners to withstand the unprecedented effects of the virus. Business collaboration has become a common feature across the entire economy. As is widely acknowledged, particularly supermarkets and manufacturers of healthcare equipment had no choice but to cooperate to manage the crisis. Recognising the economic reality, competition authorities have also re-evaluated their enforcement priorities. In March 2020, the CMA issued guidance for business cooperation necessitated by the pandemic, like many other authorities, including the European Commission. The CMA sought to assure businesses that it would not pursue them under Chapters I and II of the Competition Act as long as their agreements or unilateral behaviour were strictly necessary in scope and length and were in public interest.
Having said that, the CMA made clear that the more lenient approach to competition enforcement does not mean that those who “opportunistically seek […] to exploit the crisis” will get a “free pass”. Olivier Guersent, the current head of the European Commission’s competition department, echoed this position in early October 2020 when he ruled out a systemic softening of competition law as a result of the pandemic. According to Mr Guersent, the Commission will, if anything, intensify its efforts to curb anti-competitive behaviour.
Post-Brexit competition regulatory regime
At the time of writing, it remains difficult to evaluate the post-Brexit legal landscape in relation to competition. A set of basic assumptions can probably be made, however. The UK has always played a leading role in developing and implementing EU competition policy and competition laws in force in the UK today mirror those of the EU; that position is unlikely to change in the foreseeable future.
In terms of the institutional divide, the European Commission will no longer have jurisdiction in respect of anti-competitive behaviour affecting the UK. Equally, the CMA will not be able to refer domestic cases to the European Commission. This means that if a particular alleged anti-competitive conduct affects both the UK and the EU, the CMA and the European Commission, or the competition authority in the member state concerned, will have concurrent jurisdiction. In other words, in some cases, targets of investigations may face multiple proceedings, before the European Commission and before regulators in the UK (as well as the US and other countries if the case has impact there).
Competition laws apply, in principle, across all sectors of the economy, including the art market, to prevent and penalise anti-competitive behaviour (whether or not such was the intent of the parties involved). Art market participants must exercise caution in their interactions with competitors and business partners to ensure that joint ventures or other forms of cooperation do not amount to anti-competitive coordination. Rigging bids at auctions or fixing commissions are examples of prohibited activities that may attract enforcement action by competition authorities. When acting unilaterally, art market participants holding a certain degree of market power in a segment of the art market should be careful not to abuse their bargaining position to unduly restrict their business partners’ commercial freedom.
Constantine Cannon has won two of the three largest antitrust settlements in US history.
By Samuel Milucky, Tom Christopherson, Emelyne Peticca and Mona Yapova