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Antitrust in focus - August 2019

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Peter McDonald

Partner

Sydney

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03 September 2019

This newsletter is our take on the antitrust developments we think are most interesting to your business.

Antitrust in focus

General

Consumer and Retail

Digital/TMT

Industrial and Manufacturing

Life Sciences

Transport & Infrastructure

General

Two landmark antitrust decisions put on hold by courts: Qualcomm in U.S. and Facebook in Germany

Judge Koh’s ruling against Qualcomm in May and the German Federal Cartel Office (FCO)’s decision on Facebook in February are two of the most significant antitrust developments of 2019 so far. In Qualcomm, Judge Koh found that a range of the chip maker’s licensing practices violated US antitrust laws, including its policy of supplying modem chips on condition that mobile manufacturers agree to its license terms, charging unreasonably high royalty rates for standard essential patents (SEPs), and refusing to license its SEPs to competitors (read our full summary here). In Facebook, the FCO found that the extent to which Facebook collects, merges, attributes to and uses data in user accounts amounts to an abuse of a dominant position in the market for social networks (read our full summary here). In both cases remedies were proposed. Both Qualcomm and Facebook have appealed.

Now, in response to calls by the parties to suspend the initial decisions, the courts have weighed in. A federal appellate court has granted Qualcomm’s request for a partial stay pending appeal of the injunction issued by Judge Koh, which required Qualcomm to make its SEP licenses available to its rivals and renegotiate many of its existing licenses. The appellate court said that Qualcomm raised serious questions about the parts of Judge Koh’s ruling that create an antitrust duty to make the firm’s SEP licenses available to its competitors. The court also found that Qualcomm demonstrated that the injunction could cause irreparable harm, noting that the “fundamental business changes that the injunction imposes cannot be easily undone should Qualcomm prevail on appeal”. Qualcomm can therefore continue these practices pending the outcome of the full appeal (although some aspects of the injunction remain in place, such as those preventing Qualcomm from entering exclusive supply arrangements for modem chips). The appeal hearing is scheduled for January 2020, with the appellate court’s decision likely to be published a few months later. Interestingly, the Antitrust Division of the Department of Justice and the Departments of Defense and Energy supported Qualcomm’s request – these agencies have previously claimed the ruling could harm national security and consumers by limiting Qualcomm’s leadership in mobile technology. The Federal Trade Commission, which brought the initial complaint against Qualcomm, was unsurprisingly opposed to the stay. This inter-agency divide seems to have played a part in the court’s decision – the judges note that the “case is unique, as the government itself is divided about the propriety of the judgment and its impact on the public interest”.

Across the Atlantic, the Higher Regional Court of Dusseldorf has suspended the whole of the FCO’s decision against Facebook, stating it has serious doubts about the legality of the findings. In its preliminary ruling the Regional Court notes that the FCO failed to show that any breach of antitrust rules occurred, ie that Facebook’s conduct led to anti-competitive results for consumers or adversely affected the company’s rivals. The Regional Court rejected the FCO’s position on all counts. First, the alleged infringement of the GDPR provisions vis-à-vis consumers could not be considered a dominance abuse because antitrust law was not destined to enforce the GDPR or, for that matter, lawful terms of service. Second, there was no exploitative abuse of consumers through data collection due to a lack of any economic harm (data being duplicative); neither was the data collection excessive nor did it induce a loss of control (users having consented to the data collection, and being indifferent to data consolidation). Third, the FCO did not prove that the terms of service under competitive conditions would have been any different. Finally, the FCO did not show that Facebook’s terms of service would hinder competitors from entering or expanding in the market, or that Facebook was leveraging its dominance in social networks to other markets (online advertising etc). The upshot is that, pending the Regional Court’s ruling on the full appeal, Facebook does not need to implement the FCO’s decision (which required Facebook to change the way it consolidates data of German users from several sources outside Facebook with Facebook data). The grant of such orders is very rare. And while this is only a preliminary ruling and the Regional Court is clear that it has yet to fully engage with all the facts and pleas, it is unlikely that it will change its assessment in the main proceedings, signalling that a win for Facebook is on the cards. The FCO has announced it will appeal the preliminary ruling to the Federal Supreme Court which, in another unusual move, the Regional Court has allowed.

Qualcomm and Facebook will no doubt get a boost from these rulings as they now press on with the substantive appeals. The final judgments will be key in the hotly debated topics of how antitrust rules interact with intellectual property (Qualcomm) and data protection (Facebook). Both will be eagerly awaited.

UK CMA continues strong merger enforcement record with unwinding order, prohibition and fine for incomplete information

As previously reported, we have seen a toughening of the UK voluntary merger control regime with the UK Competition and Markets Authority (CMA) stepping up its policing of so-called ‘interim measures’. This month the CMA went a step further and required Bottomline Technologies to unwind part of its completed acquisition of the Experian Payments Gateway business. The CMA was concerned that integration between Bottomline and the target business that took place before the CMA issued an initial enforcement order could prejudice any action it may wish to take on the deal. It has ordered Bottomline to ensure the businesses segregate, destroy and/or remove access to each other’s confidential information while the CMA’s inquiry is ongoing. The CMA has also prohibited Bottomline from using commercially sensitive information on the target to solicit the target’s customers. It is the first time that the CMA has issued an unwinding order during the initial stage of a merger probe (apparently even before the formal launch of its merger inquiry). The only other unwinding order issued by the CMA – requiring termination of a distribution agreement, reinstatement of development projects and supply of products discontinued – was imposed in March during phase 2 of its investigation into Tobii’s completed acquisition of Smartbox. The CMA has now blocked this deal, marking the second prohibition so far in 2019 and equalling the tally for the previous four years put together.

This month the CMA has also penalised Rentokil for failing to fully disclose relevant documents in response to formal information requests. This relates to Rentokil’s completed acquisition of the pest control business of Mitie Pest Control (since renamed MPCL). The record fine of GBP27,000 nudges close to the statutory maximum of GBP30,000. It reflects the fact that the CMA found multiple failures to provide a material number of documents which were central to the CMA’s assessment of the merger and inconsistent with Rentokil’s submissions.

It is clear from these cases that the CMA is not afraid to use the full range of its enforcement powers to ensure the effective operation of the UK merger control regime. While we expect unwinding orders to remain a rare event, we anticipate that the CMA will continue to deter breaches of procedural rules with fines. In the meantime it is seeking to increase the level of fine that it can issue – more on this seems likely later in the year. And on the substantive side, it will be very interesting to watch how the CMA’s intervention record develops in the final months of the year.

Consumer and Retail

UK CMA imposes record RPM fine, focusing on use of price monitoring software

The Competition and Markets Authority (CMA)’s enforcement work regularly features vertical sales restrictions including resale price maintenance (RPM), where suppliers prevent resellers from offering lower prices and setting their prices independently. Most recently, it has fined Casio GBP3.7m for imposing minimum prices for the online sale of its digital pianos and keyboards. The case is particularly interesting as the CMA found that Casio used new software to monitor retailers’ prices in real time, proceeding to pressure them to modify prices when they fell below those minimum prices. It is the second time that the CMA has issued an infringement decision involving the use of price monitoring software; in 2016 it found that two online sellers used a software repricing algorithm to implement an agreement that they would not undercut each other’s prices for posters and frames sold on Amazon’s UK Marketplace. Other antitrust authorities are also actively considering the consequences of market-tracking tools – last year, for example, the European Commission fined four consumer electronic manufacturers a total of over EUR111m for fixing online resale prices, noting that the restrictions ultimately had a broader impact on overall online prices as many online retailers employed pricing algorithms to automatically adapt retail prices to those of competitors.

The size of the Casio penalty is also notable – at GBP3.7m it is the CMA’s largest ever RPM fine despite a 20% reduction for Casio’s admission of liability and co-operation. It slots into a UK trend of rising fines for RPM: GBP0.79 in the bathroom fittings and GBP2.3m in the commercial refrigeration sectors in May 2016 and GBP2.7m in the light fittings sector in May 2017. And CMA enforcement action does not always end in a fine: in 2018 the CMA issued 19 warning letters and three advisory letters alerting particular companies in a range of sectors to the illegal nature of RPM to prompt them to take action to ensure compliance. Such letters are not to be taken lightly; a supplier in the light fittings case received a 25% uplift in fine for ignoring a previous warning letter.

Recent enforcement action against RPM has not been limited to the UK. We also saw the Portuguese antitrust authority impose a record fine of EUR24m on brewer Super Bock, a board member and a director of the company for fixing minimum resale prices and other commercial conditions of its beverages in hotels, restaurants and cafes between 2006 and 2017. A children’s goods distributor was sanctioned in Slovakia and in Japan a cease-and-desist order was issued to a baby products supplier. With such active antitrust enforcement of online commerce, businesses should ensure that any use of price monitoring software is competition law compliant.

Digital /TMT

Australian antitrust regulator calls for government to rein in the influence of Google and Facebook following 18 month inquiry

Last month the Australian Competition and Consumer Commission (ACCC) released the final report in its digital platforms inquiry, centred largely on Google and Facebook. Characterised as a “world first” regulatory deep-dive into digital platforms, the Australian government instructed the ACCC to conduct the 18 month market inquiry, focussed on the impact of large digital platforms on competition in the markets for media and advertising services. In particular, the ACCC undertook an intensive study of Google and Facebook, underlined by policy concerns about the need to ensure the sustainability of public interest journalism as a crucial element of a well-functioning democracy. The inquiry also delved into related issues such as the emerging data economy and consumer privacy.

The final report contains 23 recommendations to government designed to create “holistic and dynamic” reforms to address the rise of the likes of Google and Facebook in the areas of search, social media and online advertising. They include:

  • the creation of a “Digital Platforms Branch” within the ACCC with a broad remit to monitor large platforms for potential breaches of antitrust law and any other market failures;
  • an overhaul of Australian privacy regulation and the introduction of GDPR-type laws, including requirements for clear and concise notification of, and opt-in consent to, personal data collection;
  • updates to Australian merger rules, including requiring large digital platforms to mandatorily notify the ACCC of certain acquisitions (Australia currently has a voluntary notification regime for mergers); and
  • the creation of various mandatory codes of conduct designed to govern digital platforms’ relationship with the news media industry, mandate processes for the take-down of copyright infringing material; and prevent the spread of ‘disinformation’ online.

The Australian government has now initiated a 12-week consultation on the recommendations. There will be much anticipation over which they decide to adopt, especially given that a number of the suggestions are in step with proposals made elsewhere around the globe. The UK’s Furman Report, for example, similarly recommended the creation of a “Digital Markets Unit” and a requirement for certain digital firms to make the UK Competition and Markets Authority aware of all intended acquisitions (again, in the context of a voluntary merger regime).

Allen & Overy has advised Google throughout the ACCC’s inquiry.

U.S. DOJ conditionally approves T-Mobile/Sprint mega-merger, but state challenges continue

In the past 12 months, mobile telecoms deals on both sides of the Atlantic have been in the antitrust spotlight. Now, over a year after the parties announced the potential deal, the U.S. Department of Justice (DOJ) and five state attorneys general (AGs) have approved the merger between T-Mobile and Sprint, subject to conditions. Under the terms of the proposed settlement, T-Mobile and Sprint must sell off Sprint’s prepaid business, including Boost Mobile and Virgin Mobile, to Dish, together with certain spectrum assets. The parties have also agreed to other concessions, including making cell sites and retail locations available to Dish, and providing it with access to the T-Mobile network for seven years while it builds out its own 5G network. The aim is to enable Dish to become a fourth mobile network operator alongside the combined T-Mobile/Sprint, Verizon and AT&T, replacing the competition the DOJ alleges will be lost as a result of the merger.

The safe passage of the deal is not, however, guaranteed just yet. The settlement requires court approval, and from a regulatory perspective the Federal Communications Commission (FCC) must also approve the merger (although this looks likely after the FCC Chairman recommended it be cleared subject to conditions). Plus, while five state AGs were party to the settlement, the AGs of 15 other states (plus the District of Columbia) are still opposed to the deal and have filed a legal challenge to block the merger. The New York AG has stated that concerns remain despite the DOJ’s approval – in particular over whether Dish will be a credible independent fourth network operator – and that the suits will continue. A trial is set for December. Overall, the case cements the trend towards the increased involvement of state AGs in merger control enforcement, particularly in cases which raise local concerns.

European Commission doubts legality of Czech mobile operators’ network sharing agreement

The European Commission acknowledges that network sharing between mobile operators usually benefits consumers through greater efficiencies and cost savings, faster roll out and higher service quality. It has however objected to an agreement that it thinks in fact removes the incentives for the operators to improve their networks. The Commission has provisionally concluded that the network sharing agreement between the two main mobile operators in the Czech Republic, O2 CZ/CETIN and T-Mobile CZ, restricts competition and harms innovation in the more densely populated areas of the country in breach of the EU antitrust rules. The authority points to the specific circumstances of the Czech mobile market: (i) it is highly concentrated with only three mobile network operators; (ii) the sharing parties are the two largest operators, serving around 75% of subscribers; and (iii) the third operator, Vodafone, is smaller and, unlike the sharing parties, “has no meaningful presence” in the fixed telecoms segment. The Commission also appears to take issue with the scope of the agreement – it covers all mobile technologies and the whole of the Czech Republic with the exception of Prague and Brno, adding up to 85% of the population.

The Commission’s approach in this case can be contrasted with its position in a number of merger cases. To address concerns over telecoms deals, the Commission has in the past shown a preference for remedy packages that include network sharing arrangements (see, for example, the WIND/3 Italia joint venture), with seemingly little consideration as to whether the network sharing would itself give rise to antitrust concerns. The Commission’s final decision in the case will therefore be interesting from this perspective. Depending on the result, it may well also influence how telecom operators choose to co-operate in future. In the meantime, the statement of objections encourages operators to exercise caution and not assume all network sharing will avoid antitrust scrutiny.

Industrial and Manufacturing

Asphalt makers fined record amount for Japanese price fixing cartel

Japan’s Fair Trade Commission (JFTC) has long been an active enforcer of Japanese antitrust rules. In a much anticipated decision, it has fined eight Japanese manufacturers of asphalt JPY39.9bn (EUR329m) for agreeing to increase prices. The JFTC also issued cease-and-desist orders against seven of the eight companies. Not only do the orders require the firms to stop the illegal conduct, but interestingly they also oblige them to put in place monitoring systems to prevent future collusion, conduct regular audits, and ensure that the employees involved in the anti-competitive behaviour are assigned to other positions for a period of five years. A ninth asphalt maker, Nippo, received full leniency.

The fine is the largest ever imposed by the JFTC for an antitrust infringement. Given that the conduct reportedly impacted prices across all regions, and the companies involved had previously been found to have engaged in cartel conduct, it is perhaps no surprise that the behaviour resulted in a record-breaking penalty. Compared to 2018, where total fines imposed by the JFTC reached only EUR16.5m, it is a significant increase (for more on this, see our Global Cartel Enforcement report). And higher fines may well feature more regularly in Japanese antitrust enforcement going forward – in March 2019 the Cabinet approved proposed changes to the antitrust law which will increase the level of fines that the JFTC can impose (while on the flip side expanding the leniency programme). The bill now awaits sign-off by the Diet.

German economy minister overturns FCO block of metal parts deal on public interest grounds

In our May Antitrust in focus we reported that Miba and Zollern had asked Germany’s economy minister to override, for public interest reasons, a Federal Cartel Office (FCO) decision to prohibit their metal parts joint venture. Now the minister, Peter Altmaier, has done just that, approving the transaction on environmental grounds. The FCO had found that the deal would combine rivals in an already concentrated market (sliding bearings) and could hinder customers’ choice. Altmaier, on the other hand, concluded that any impact on competition is outweighed by the joint venture’s environmental policy objective – the parties are developing plain bearings for renewable wind energy and the deal would help to preserve know-how and innovation in the bearings market. His approval is conditional: the parties must contribute their know how on plain bearings to the joint venture; operate it without any change in ownership structure for at least five years; and invest EUR50m in research and development over the five-year period.

The right of the minister to override FCO decisions is rarely exercised. In fact, there have been just over 20 cases where merging parties have requested the override, and only ten instances of it being granted. Altmaier himself notes that his decision is an “exception”. While there has been no comment from the FCO since Altmaier’s announcement, the German Monopoly Commission (GMC) has openly criticised the decision. The GMC, which advised Altmaier on the competitive aspects of the deal as part of the proceedings, has questioned whether the existing competitive concerns are outweighed by advantages to the economy as a public interest. It also failed to find any sufficient remedies. Finally, looking at the wider context, the case comes in the aftermath of calls by Altmaier and his French counterpart for the EU merger rules to be amended. Following the European Commission’s prohibition of Siemens/Alstom they proposed that Member State representatives should be able to overrule the European Commission’s merger decisions to further broader industrial objectives. This was strongly opposed by Competition Commissioner Margrethe Vestager, as well as a number of Member States and commentators. At least at the EU level, therefore, the debate about the relationship between antitrust rules and industrial policy is far from over.

Life Sciences

UK CMA antitrust pharma investigation set to secure GBP8m compensation for NHS

The UK Competition and Markets Authority (CMA) has been conducting several investigations into suspected anti-competitive practices and agreements in the pharmaceutical sector, relating to a number of different drugs. Now, an investigation opened in October 2017 into the UK supply of fludrocortisone acetate 0.1 mg tablets, a prescription-only treatment for Addison’s Disease, looks set to result in a novel antitrust remedy. The CMA’s probe has two strands. Under the first the CMA is concerned that Aspen’s acquisition in October 2016 of a marketing authorisation for fludrocortisone acetate tablets, in circumstances where Aspen held the only other marketing authorisation for the drug in the UK, preserved and strengthened the company’s dominant position and its resulting ability to charge supra-competitive prices. Last month, to address the CMA’s ongoing concern and terminate that aspect of the CMA’s investigation without an infringement decision, Aspen offered formal commitments to: (i) pay the NHS GBP8m – compensation which could save the Government the trouble of claiming damages in court (but would not preclude it from seeking further damages if it considers appropriate); and (ii) divest the UK rights over the acquired product and reintroduce and commercialise its original product to ensure two future fludrocortisone acetate tablet suppliers in the UK. The CMA is currently consulting on the commitments. If they are accepted it will be the first time that the CMA has secured a payment to the NHS in a pharma probe. Unusual as a potential abusive behaviour, it is unclear whether Aspen’s 2016 acquisition was considered under the UK’s merger control regime.

Aspen has also sought to resolve the second strand of the CMA’s case against it. The company has admitted to participating in a historic market sharing agreement involving fludrocortisone acetate tablets (paying two rivals to stay out of the market to protect its sole UK supplier position) and has agreed to pay a maximum fine of GBP2.1m should the CMA reach a formal decision that antitrust law has been broken. We will know more about this aspect of the case should the CMA issue a statement of objections, a decision it expects to take in September/October.

Transport & Infrastructure

Largest ever Australian criminal cartel fine imposed on shipping company K-Line

The international maritime transport of vehicles has been the subject of antitrust investigations and fines in a number of jurisdictions across the globe including EuropeMexico, Japan and the U.S. And shippers to Australia have not avoided scrutiny. This month the Federal Court found K-Line engaged in a cartel to fix prices on the transport of cars, trucks and buses to Australia between 2009 and 2012, after already having convicted NYK in August 2017 for its involvement in the conduct. K-Line has been sentenced for one “rolled up” criminal charge of giving effect to cartel provisions, and fined AUD34.5m (EUR21.1m) – the largest ever criminal fine imposed under Australia’s 2009 criminal cartel laws. The level of penalty has been welcomed by the Australian Competition & Consumer Commission (ACCC) which was keen to see the Federal Court impose higher fines on companies to deter breaches of antitrust law. The judge noted that the fine “should send a powerful message to multinational corporations that conduct business in Australia that anti-competitive conduct will not be tolerated and will be dealt with harshly…even where…the decisions and conduct are engaged in overseas and as part of a global cartel”.

The ACCC’s investigation into other alleged cartel members is continuing (Wallenius Wilhelmsen was charged only last week). Penalties could rise. K-Line’s fine includes a 28% discount for its early guilty plea in April 2018 and its level of assistance and co-operation, mitigating factors that may not be available to other operators.

About your editor - Peter McDonald

Peter is a partner based in our Sydney office, and he leads and co-ordinates our competition team in the APAC region. He specialises in challenging competition law, and consumer and regulatory issues. His expertise encompasses transactional advice, merger clearances, joint ventures and collaborations, access to infrastructure, cartel and other non-merger investigations and enforcement responses and defence, across a wide range of sectors.

Before joining the firm, Peter worked as a senior officer at the Australian Competition and Consumer Commission. He is a member of the competition and consumer committee of the Law Council of Australia, and is also a regular non-governmental adviser to the International Competition Network of competition authorities. Peter is recognised as a leading individual in all major directories, including Who’s Who Legal, Chambers & Partners Asia-Pacific, The Legal 500: Asia Pacific and IFLR1000.

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