Antitrust in focus - June 2020
26 June 2020
This newsletter is our take on the antitrust developments we think are most interesting to your business.
Dominic Long, partner based in London and Brussels, is our editor for this edition. He has selected:
- European Commission proposals for new competition and digital economy regulation set to shake up antitrust enforcement
- European Commission proposes unprecedented measures to tackle foreign subsidies causing market distortions
- Foreign investment control hitting the headlines around the globe
- CMA still driven in its pursuit of director disqualifications
- Advocate General recommends top EU court upholds Lundbeck pay-for-delay infringement
- European Commission shows flexibility towards merger commitments
- UK High Court confirms that complying with court-ordered disclosure does not breach antitrust rules
- European antitrust authorities refereeing an unprecedented number of antitrust complaints relating to football
The question of whether EU antitrust rules are suitable in an increasingly globalised and digitalised world has been the subject of fierce debate and numerous expert reports in recent years. As calls for change escalate, particularly from certain EU Member States, the European Commission has launched a consultation on a radical way forward. It proposes a three-pillared approach:
- First, a brand new competition tool to enable the Commission to address structural competition problems in markets with structural and/or behavioural remedies, without needing to prove an infringement of the antitrust rules. The Commission is seeking views on whether this tool should only apply to dominant companies, or more widely. And whether it should be limited to digital markets (or those with particular features), or apply to all industry sectors.
- Second, as part of its wider Digital Services Act initiative, ex ante regulation of digital platforms. Again, the details are to be ironed out following the consultation, but could include prohibiting large online platforms from engaging in certain “blacklisted” practices, and the Commission having powers to impose structural and/or behavioural remedies on a case-by-case basis in order to keep digital markets competitive, transparent and open to innovation.
- Finally (and this will come as no surprise), vigorous enforcement of existing antitrust rules, including making greater use of interim measures and remedies to restore competition.
The proposals, if adopted, will have major implications for the digital sector and (likely) beyond. Legislative proposals are expected in Q4 2020. Read more about all three pillars of the approach and their impact in our alert.
It has been clear for some time that the European Commission believes the current regulatory framework (including merger control, trade laws, foreign investment control mechanisms and public procurement) is not sufficient to protect European interests against companies supported by non-EU subsidies. The Commission has now published a White Paper setting out options for new legal instruments to fill that gap. The proposals are far reaching. On the table is a mandatory filing system to review foreign-backed acquisitions of European businesses, under which the Commission would have the power to accept remedies and even block deals. Plus a more general instrument enabling the Commission and Member State authorities to monitor and investigate all forms of foreign subsidy that may distort the internal market. And, finally, obligations to notify relevant authorities of foreign support during public procurement and EU funding award procedures. Our alert tells you what you need to know about the White Paper, highlighting the key areas of controversy.
As the economic impact of Covid-19 deepened this month, we have seen governments from all corners of the globe introducing or strengthening foreign investment control regimes to protect national assets deemed critical or sensitive. In many instances action has been taken extremely swiftly. A number of countries have also taken steps to reform laws to address more general concerns around national security. The updates below give a flavour of what has been going on:
- In the UK, the government has introduced amendments to the public interest regime to allow it to scrutinise certain mergers and takeovers to ensure that they do not threaten the UK’s ability to combat public health emergencies (this could apply, for example, to the acquisition of a business directly involved in a pandemic response such as a vaccine research firm). More broadly, the government has taken steps to extend its existing powers to intervene in deals on national security grounds to mergers involving artificial intelligence, advanced materials and cryptographic authentication technology. Our alert sets out the details of the two changes. And these measures pave the way for a more radical overhaul in the UK – the government looks set to soon announce the introduction of a mandatory regime to screen acquisitions that may raise national security concerns, with criminal sanctions (financial penalties and disqualification and imprisonment for company directors) for non-compliance.
- In Germany, the scope of companies qualifying as critical infrastructure, and therefore subject to mandatory filing on acquisition of a 10% shareholding, was extended to include certain products and services in the healthcare sector (such as personal protective equipment and essential drugs) and digital radio for government authorities. At the same time, the German government clarified that asset deals fall within the scope of screening and that the review may take into account whether an acquirer is directly or indirectly controlled by a government. See our alert for more information. Another set of amendments has also been approved by the German Parliament. The German government is entitled to consider not only the interests of the Federal Republic of Germany but also interests of other EU Member States and the EU itself when assessing whether a transaction is sensitive or not. Plus transactions in the field of critical infrastructure are subject to suspensory effect, meaning the acquisition of a German business by an non-European investor cannot close without clearance from the Ministry. Finally, parties are banned from sharing information prior to receiving clearance – breaches are a criminal offence (punishable by up to five years in prison). The amendments are expected to enter into force in the next few days. Our alert gives more details.
- In the Netherlands, the government is expediting the introduction of a screening mechanism – to apply retroactively from 2 June 2020 – for investments in high-end sensitive technologies and critical infrastructures, in particular in the energy, transport, petrochemical and financial sectors. The move follows the introduction of a mandatory notification requirement for acquisitions of certain large undertakings in the telecom sector in May. See our blog for more on both of these developments.
- Poland is on the cusp of introducing anti-takeover provisions as part of its ‘Anti-Crisis Shield 4.0’. A draft act will give the President of the Office of Competition and Consumer Protection additional powers to protect Polish enterprises whose businesses are of importance to public order, public security or public health.
- The Canadian government has responded to the negative impact of the pandemic on the practicalities of the review process with a draft legislative proposal to allow the extension of review timelines by up to six months.
- In Japan, certain medical fields, including those related to dealing with the Covid-19 pandemic, have been added to the list of domestic industrial sectors as “core” business sectors that are subject to heightened foreign investment restrictions. The expansion of the regime will take effect on 15 July. It closely follows the full application of important new rules this month which, among other amendments, reduced the pre-notification filing threshold for acquisitions of shares or voting rights to 1% (from 10%). This alert discusses the key changes and their potential implications for foreign investors.
- A temporary Covid-19-related scheme has come into force in New Zealand under which investors must notify investments in more than 25% of a New Zealand business or more than 25% of a New Zealand business’ assets, as well as increases to existing shareholdings beyond 50% or 75% or to 100%. The rules have also been changed more generally to introduce a separate national interest assessment for some transactions that are already subject to screening and stronger enforcement powers for non-compliance (with the maximum fine being increased to NZD500,000 for individuals and NZD10m for corporates).
- Australia moved early in response to Covid-19 – it introduced temporary changes, including a reduction in the intervention threshold to AUD0, back in March (see our alert for more details). But now – to address broader rising national security concerns – the government has announced significant reforms to the review framework which it is aiming to have in place by 1 January 2021. Draft legislation is yet to be released, but key elements will include a new national security test for foreign investors who will be required to seek approval to start or acquire a “direct interest” in a “sensitive national security business”, regardless of the value of the investment, and a time-bound “call in” power enabling the Treasurer to review acquisitions that raise national security risks outside of proposed acquisitions relating to a “sensitive national security business”.
For more information on foreign investment control developments in light of the Covid-19 crisis, please refer to our tracker table. Also watch out for further insights in our upcoming edition of M&A Insights, due out in early July.
Over the past year, we have seen the UK Competition and Markets Authority (CMA) significantly ramp up the use of its director disqualification powers. In June, the CMA secured four more sets of director disqualification undertakings, bringing the total to 18 (from just one in April 2019). Two directors of Berkshire estate agencies have been disqualified from acting as directors of any UK company for six and a half years for their role in a price-fixing cartel. The third and fourth undertakings relate to a single individual – Amit Patel – a former director of pharmaceutical firm Auden Mckenzie (found earlier this year to have engaged in market sharing of an anti-depressant), and current director of Amilco (alleged to be involved in a separate infringement involving market sharing of a drug to treat Addison’s disease). Each disqualification is for five years (see here and here), and they run concurrently.
So far, all disqualifications secured by the CMA have been in the form of undertakings agreed with the individual in question. This has advantages for the CMA – the majority of the undertakings have been nailed down without the authority incurring the costs of applying to the court to seek a disqualification order. It can also have benefits for the individual – the CMA notes that Mr Patel’s disqualification would have been at least six years had he not voluntarily entered into undertakings. The CMA has a clutch of ongoing cases, however, where the individuals concerned are opposing the disqualification. The CMA must therefore argue its case in court, as it did for the first time this month in relation to another estate agency cartel. How the authority fares in these proceedings may well have an impact on its appetite to seek such court orders in future and, in turn, on its ability to extract undertakings from individuals.
Finally, it is worth noting that the CMA is not alone in pursuing sanctions against individuals for breaches of antitrust rules. Also this month, a New Zealand court published its ruling in a pharmacy price-fixing case – one of the pharmacy’s directors was fined NZD50,000 (EUR29,000). And the U.S. Department of Justice, in announcing indictments against four senior executives over alleged price fixing in relation to chicken processing, confirmed its commitment to holding individuals responsible for their actions. Indeed, the former CEO and President of Bumble Bee Foods was this month sentenced to serve 40 months in jail and pay a USD100,000 criminal fine for his leadership role in a canned tuna price-fixing conspiracy.
Last month’s edition of Antitrust in focus went to press just as the General Court handed down its landmark ruling to overturn the European Commission’s 2016 prohibition of Three/O2 (a transaction that would have brought together two of the UK’s four mobile network operators). The court found errors of law and assessment in relation to each of the theories of harm on which the Commission’s decision relied. Most significantly, the court clarifies the circumstances in which the Commission can prohibit transactions for significantly impeding effective competition where they fall short of creating or strengthening a “dominant” player – effectively making it harder for the Commission to block such deals. This could be a game-changer for the Commission’s approach to merger assessment and, for this reason, it seems highly likely that the Commission will appeal. To find out more about what the court ruled, and its implications for consolidation in the telecom sector and beyond, read our alert.
Patent settlement agreements involving a value transfer (monetary or otherwise) between the holder of a pharmaceutical patent and generic drug manufacturers (so-called ‘pay-for-delay’ agreements) have faced intense antitrust scrutiny. In the EU, the European Commission reached its first antitrust infringement decision in a pay-for-delay case in 2013, fining Lundbeck EUR94m for paying four generics manufacturers to stay out of the market for an anti-depressant drug. The parties challenged the decision and, after the General Court rejected their appeals, took the case to the European Court of Justice (ECJ). The Advocate General (AG) – who makes recommendations as to how the ECJ should decide a case – has now handed down her opinion.
The opinion is not surprising – the AG has followed the ECJ’s reasoning in January’s landmark GSK ruling, which answered questions referred from a UK court about the application of EU antitrust rules to pay-for-delay agreements (see our alert on the GSK case for more details). In the AG’s opinion, the General Court was right to find a relationship of potential competition between Lundbeck and the generics companies. The fact that, for example, Lundbeck still held process patents in relation to the drug, and that the generic firms did not yet have the relevant marketing authorisations, did not affect this conclusion. The Commission must show, said the AG, that a generic company has a real and concrete possibility of entering the market. The AG also opined, again following GSK, that pay-for-delay agreements amount to restrictions of competition “by object” if the value transfer “has no other explanation than the common commercial interest of the parties not to engage in competition on the merits”. In terms of the fine, the AG recommended that the amount is upheld (and not replaced with a symbolic fine as argued by Lundbeck), noting that it was foreseeable that agreements of this type might be caught by EU antitrust rules.
The AG’s opinion, like the GSK ruling, sets a high bar for pharmaceutical companies to show that these types of patent settlement agreement are not anti-competitive by object. While opinions are not binding, in most cases they are followed by the ECJ – even more likely here given that the reviewing judges are the same as those that ruled in the GSK case. The judgment is much anticipated by pharmaceutical companies and the Commission (which notably, shortly after the AG delivered her opinion, clarified the charges in its ongoing pay-for-delay investigation into Teva). It is expected in the coming months.
At the end of May, the European Commission waived commitments made by Takeda in November 2018 to obtain clearance for its acquisition of Shire. Following a phase 1 review, the Commission had concerns that Shire was developing a biologic treatment for inflammatory bowel disease that would compete closely with a treatment offered by Takeda. So Takeda offered to divest Shire’s pipeline product to a purchaser that had an incentive to develop the drug – but, crucially, the Commission didn’t insist on an upfront buyer, and the transaction closed. Since then, new and better alternative drugs have emerged, the Shire drug has received negative results, and the divestment business has experienced difficulties recruiting patients for the clinical trials. Two “formal and rigorous” processes to sell the drug, engaging with more than 60 potential purchasers (the second was by a divestiture trustee) were unsuccessful. All in all, the Commission has now concluded that these “exceptional circumstances” mean the divestment is no longer necessary and waived the commitments in their entirety.
The Commission’s apparently pragmatic approach does not appear limited to pipeline drugs, the future of which are intrinsically difficult to predict. Last month, the Commission also partially waived commitments given as a condition to its April 2019 phase 2 approval of Nidec’s acquisition of Whirlpool’s refrigeration compressor business (Embraco). In accordance with the commitments, Nidec divested its refrigeration compressor business for both household and light commercial applications, including a number of plants. But the Commission has now waived a clause preventing Nidec from reacquiring a fixed-speed household compressor manufacturing line, which was part of the divestment business that Nidec committed to sell, after an investigation showed that the structure of the relevant markets had changed to such an extent that the absence of influence over the line was no longer necessary. It remains to be seen if these are one-off cases, or a more general sign of the Commission’s willingness to be flexible where market conditions don’t follow an expected course – a welcome attribute in the uncertain times ahead.
The exchange of commercially sensitive information can, on its own, amount to a breach of antitrust rules. But what if the disclosure of information is ordered as part of court proceedings? This question arose in recent UK High Court patent infringement litigation between pharma companies Teva and Chiesi. Teva challenged the validity of certain patents held by Chiesi relating to asthma treatments. In response, Chiesi counterclaimed for an injunction on the basis that Teva was threatening and intending to infringe the patents by developing a rival product. It sought disclosure of information relating to the rival product. Teva resisted this, arguing that as it and Chiesi would likely be considered potential competitors, the disclosure would amount to the unlawful sharing of commercially sensitive information in breach of EU antitrust rules.
The High Court judge disagreed. He ruled that resolving disputes between potential rivals about patent validity and infringement is inherently pro-competitive and disclosure is part and parcel of such litigation. An information exchange in such circumstances would not meet the threshold required to amount to an antitrust infringement. The judgment does not come as a surprise, but it is a useful confirmation of the boundaries of the antitrust rules. And the judge was careful to note that it would be a different matter if the litigation was a sham, designed specifically to facilitate anti-competitive information exchange – in such circumstances, antitrust rules would bite.
Sports federations and governing bodies are subject to EU antitrust rules, at least to the extent they are engaged in an economic activity – as clarified in a 2006 judgment of the European Court of Justice in the Meca-Medina case. Despite this ruling, there have been few cases of antitrust enforcement in the sports sector, at either EU or national level. In the past couple of months, however, we have seen a surge in complaints and investigations relating to football. Many of the cases stem from the way that national football associations or leagues have handled the impact of the Covid-19 pandemic.
In Portugal, the antitrust authority has imposed interim measures (for the first time in over ten years) on the Portuguese Football League. It ordered the league to suspend an agreement between football clubs not to poach players who unilaterally terminate their employment contracts due to issues caused by Covid-19, finding that the agreement distorts the normal functioning of the market. The Belgian antitrust authority, too, looks set to go down the interim measures route against the Jupiler Pro League, Belgium’s top football league. After the football league decided to permanently discontinue the season and demoted the last-placed club, Waasland-Beveren, the club’s main shareholder lodged an antitrust complaint, which was followed by a complaint from the fan club. A preliminary non-binding opinion of the authority’s auditor found a prima facie breach of antitrust rules – the decision to demote excluded a competitor with no legitimate justification – which led the club to confidently announce that the authority will follow suit and grant the interim measures. This is just one of several complaints by football clubs made to the Belgian antitrust authority (not all Covid-19-related). In Switzerland, club FC Scion’s complaint against the Swiss Football League’s decision to restart the season has ultimately been dismissed by the Swiss antitrust authority. FC Scion alleged that the League abused its dominant position, as resuming fixtures would disadvantage smaller clubs where many contracts expire at the end of June. The authority disagreed, finding that the decision to restart revives competition between clubs under equal conditions, and that the League dealt with the issue of expiring contracts with special measures.
Finally, looking beyond Covid-19 and football, this month the General Court heard the appeal by the International Skating Union (ISU) against a European Commission infringement decision. In 2017, the Commission found that ISU rules imposing severe penalties on athletes participating in speed skating competitions not authorised by the ISU were in breach of EU antitrust law prohibiting restrictive business practices. The ISU was ordered to change its rules, although no fines were imposed. The ISU is appealing the decision on the basis that its rules in fact pursued a legitimate objective. The General Court’s ruling is eagerly awaited – by the ISU and sporting bodies across the EU alike.
A&O antitrust team in publication
Recent publications by members of our global antitrust team include an article (in German) on the modernisation of abuse of dominance:
- Dr René Galle (Counsel, Hamburg): Die Modernisierung der deutschen Missbrauchskontrolle: Gedanken zur 10. GWB-Novelle und darüber hinaus, DER BETRIEB, Issue 24/2020, p.1274-1280
About your editor
Dominic is a partner in our global antitrust team, based in London and Brussels. He advises on complex antitrust matters, including multi-jurisdictional merger control clearances before both national and supra-national antitrust authorities, and high-profile behavioural cases, including pursuing and defending claims for clients in IP-related abuse of dominance and anti-competitive agreement investigations. He also regularly acts on EU State aid matters and market investigations. Dominic is noted for his experience in national security/foreign direct investment reviews, and has particular expertise in the UK merger control and public interest regime, having advised clients on four major public interest interventions under the UK’s Enterprise Act 2002 (including before the Competition Appeal Tribunal and the Court of Appeal). While Dominic works closely with clients across a broad range of sectors, TMT and life sciences are a key focus of his practice and he is regularly sought out by clients in these sectors for strategic guidance on antitrust and related regulatory issues.
Dominic is admitted as a solicitor in England & Wales and in Ireland and is listed as a European lawyer at the Brussels Bar.