Antitrust in focus - December 2020
18 December 2020
This newsletter is our take on the antitrust developments we think are most interesting to your business.
Dirk Arts, partner based in Brussels, is our editor this month. He has selected:
- U.S. FTC merger enforcement gathers pace
- China affirms application of merger control to VIE structures with gun-jumping penalties
- European Commission positive about implementation of Damages Directive
- Both EU and UK set out ground-breaking plans for regulation of digital firms
- Facebook hit with U.S. antitrust suits over past deals and ongoing conduct
- ECJ annulment of Commission’s Paramount pay-TV decision gives third parties more weight in the commitments process
- European Commission completes current cycle of pay-for-delay probes with fines imposed on Teva and Cephalon
This month we have seen a flurry of activity on the merger control front from the U.S. Federal Trade Commission (FTC). Grabbing the headlines is the announcement that the FTC (and 48 attorneys general) have filed suit against Facebook, alleging that the firm breached antitrust laws through acquisitions and other conduct – see below for a separate article which sets out what you need to know.
Additional proof of the FTC’s continued willingness to challenge deals lies in its decision to file administrative complaints to block three proposed deals in the last three weeks alone:
- The Procter & Gamble Company’s proposed acquisition of Billie ‒ the FTC alleges that this transaction would allow P&G, the market-leading supplier of women’s and men’s wet shave razors, to buy a newer but rapidly expanding maker of women’s razors and so eliminate substantial and growing competition in the direct-to-consumer sector as well as halting Billie’s expansion into bricks-and-mortar retail stores. Notably, it’s the second FTC challenge in the razor sector this year ‒ Edgewell Personal Care Co. abandoned its planned acquisition of Harry’s in February after the FTC filed to block the transaction which it said would remove “a uniquely disruptive competitor in the wet shave market”.
- Hackensack Meridian Health, Inc.’s proposed acquisition of Englewood Healthcare Foundation ‒ the FTC alleges that this merger of closely competing New Jersey healthcare systems would increase price and reduce quality of healthcare. Not three weeks before this challenge, the FTC sued to block a healthcare system’s acquisition of two hospitals from a direct competitor in the Memphis area.
- CoStar Group Inc.’s proposed acquisition of RentPath ‒ the FTC alleges that this transaction between “aggressive, head-to-head” close rivals would significantly increase concentration in the already highly concentrated markets for internet listing services advertising for large apartment complexes in 49 metropolitan areas across the U.S., and eliminate price and quality competition that currently benefits both renters and property managers.
All the trials are scheduled to begin in June next year. They add to the list of now 12 challenges in total this year. Of course these court proceedings do not always go the FTC’s way. This month, in the first FTC-loss in a challenge to a hospital merger since 2016, a Pennsylvania federal court rejected its application for a preliminary injunction to pause a merger between Philadelphia health care systems Jefferson Health and Albert Einstein Healthcare Network on the basis of a lack of sufficiently strong evidence of competition harms (commercial insurers could avoid any price increases resulting from the merger). The FTC has asked a federal judge to halt the merger pending an appeal of that order. However, the FTC will be happy to have wrapped up its bid to unwind Otto Bock HealthCare North America, Inc.’s completed acquisition of Freedom Innovations. The FTC has approved a divestment to Proteor of the assets acquired to preserve competition for microprocessor prosthetic knees. The FTC’s November order, upholding an administrative law judge’s decision, represented the first time that the current Commission ordered that a consummated acquisition be unwound.
Watch out for our upcoming report on global trends in merger control enforcement, which will analyse data on the 2020 activities of authorities in 26 jurisdictions, including the U.S., EU and China.
For a few months now the Chinese antitrust regulator, State Administration for Market Regulation (SAMR), has been warning that deals involving variable interest entity (VIE) structures (which allow foreign investors to enter restricted sectors of China’s economy, but have always fallen into a legally grey area) should be reviewed under the merger control regime if the pre-merger notification thresholds are met. This is a significant development (but, as SAMR pointed out, only a clarification) – to date, VIE arrangements have rarely been notified despite there never having been any explicit endorsement that deals involving VIE-structured companies can be exempted from the merger control regime in China. In July, SAMR publicly cleared a transaction involving VIE-structured companies (Mingcha Zhegang/Huansheng). Last month it confirmed the position in draft antitrust guidelines for China’s platform economy (on which we reported) and it announced an investigation into another transaction involving VIE-structured companies (Huya/DouYu). And, dispelling any doubt, SAMR has this month, for the first time, publicly fined three companies ‒ Alibaba Investment, China Literature (a Tencent-controlled company) and Hive Box (an SF Express affiliated entity) ‒ for completing separate acquisition deals involving a VIE structure without first notifying the regulator. Significantly, despite the fact that none of the deals was ultimately found to eliminate or restrict competition, all three companies have been hit with the highest possible fines under the current regime: CNY500,000 (approx. EUR63,000). The level of fine exceeds the largest gun-jumping penalty of CNY400,000 previously imposed by SAMR. At the same time, SAMR indicated that it is currently investigating other failure to file cases in the internet sector following third party complaints. It is not yet clear, however, whether SAMR is intending a more systematic investigation of all previously completed VIE-structured transactions or how it would go about that process. But it does indicate that SAMR is setting itself up for a headline-grabbing new chapter of robust antitrust enforcement, in particular in the digital sector. Technology companies should review past merger activities and consider whether to proactively report to SAMR.
Senior Associate Jiaming Zhang has been quoted by Reuters commenting on the developments.
The EU Damages Directive (Directive) was adopted in 2014. Its aim was to facilitate effective compensation for businesses and individuals that have suffered harm as a result of antitrust infringements. In short, it laid down various principles (such as the right to full compensation and the possibilities for obtaining disclosure of evidence) that Member States were required to implement into their own legal systems. The European Commission has this month published a report on the implementation of the Directive. Overall, the Commission has observed an increase in the total number of damages actions since the adoption of the Directive, as well as a wider spread of actions across Member States. It notes that Member States have implemented the key rules of the Directive in a consistent manner. However, it intends to continue to monitor developments in Member States with a view to reviewing the Directive once sufficient experience on the application of its rules is available. For more information on the Commission’s report and its conclusions, see our alert.
The end of 2020 has been an incredibly busy time in terms of antitrust policy in the digital sector. On 15 December, the European Commission published its draft Digital Markets Act (DMA), setting out proposed EU rules for certain digital platforms. If adopted, “gatekeepers” of “core platform services” (the DMA provides for a three-limbed test, with rebuttable presumptions, to determine which firms should be designated as gatekeepers) would be required to follow a list of ‘do’s and don’ts’. These include a prohibition on discriminating in favour of their own services and obligations to share data generated by business users and their customers in their use of the platform. There will be significant fines – up to 10% of global group turnover – for non-compliance, and the possibility of repeat offenders being required to sell off parts of their business. The DMA also gives the Commission the power to conduct market investigations to enable it to identify firms that should be designated with gatekeeper status, to update the criteria and list of obligations, and to design remedies to address systematic infringements. The DMA was published alongside a draft Digital Services Act (DSA), which applies to all digital services providers and will change the rules for handling of illegal or potentially harmful content online, the liability of online providers for third party content, vetting obligations of third party suppliers and the protection of users’ fundamental rights online. The proposals are significant, but are not likely to be adopted for some time – potentially two years or more. See our summary alert describing the headline elements of each of the DMA and DSA, and our more detailed commentary on the DMA and its likely impact.
In the weeks before the Commission announced its proposals, we saw the UK make significant progress in its own plans for a digital-specific rulebook. First, the UK Government announced its commitment to taking forward proposals by the Competition and Markets Authority (CMA) for a new regulatory regime for online platforms and other digital firms. Just ten days later, the Digital Markets Taskforce – commissioned by the Government to give advice on the design and implementation of the planned regime – made its recommendations. The result: the UK looks set to introduce a regime applying to digital firms having “strategic market status” (SMS). A new Digital Markets Unit (DMU), to sit within the CMA, would have the power to designate firms with SMS. The Taskforce recommends that the regime comprises three pillars. First, each SMS firm would have a tailored code of conduct, setting out clear principles for it to follow, enforceable by the DMU. Second, the DMU would be able to make ex ante “pro-competitive interventions” (such as requiring access to data or even operational or functional separation of businesses) to drive greater competition and innovation. Third, SMS firms would be subject to a radical new merger regime, including a mandatory suspensory notification process for transactions that meet certain (yet undefined) thresholds. The Government will now consider the Taskforce’s recommendations, and intends to consult on the proposed rules in early 2021, with the expectation that the DMU will begin its operations in April. For more information on the plans and their likely impact, see our alerts on the Government response and Taskforce recommendations.
These developments tie in with reform initiatives for the digital sector that are taking place across the globe, including in Australia, Germany and Japan. A key question (and one that the UK’s Taskforce discusses in its recommendations) is how a potential patchwork of regulatory systems and enforcement might fit together – the digital firms likely to be affected will no doubt be hoping for as much harmonisation as possible.
On the heels of the U.S. Department of Justice (DOJ)’s monopolisation suit against Google (see our October edition of Antitrust in focus for more details), the U.S. Federal Trade Commission (FTC) has filed a landmark suit against Facebook, alleging a near-decade long course of anti-competitive conduct. A coalition of 48 attorneys general (representing 46 states, the District of Colombia and the territory of Guam), with which the FTC notes it cooperated closely during its investigation, has filed a parallel suit. The FTC’s complaint alleges that Facebook has undertaken a systematic strategy to eliminate threats to its monopoly in personal social networking services, which in turn has negatively affected consumers and advertisers. The complaint centres on two allegations:
- Anti-competitive acquisitions: the FTC says that Facebook targeted potential competitive threats to its dominance through its 2012 acquisition of up-and-coming rival Instagram and its 2014 acquisition of mobile messaging app WhatsApp.
- Anti-competitive platform conduct: according to the FTC, Facebook made key application programming interfaces (APIs) (that allow third-party software developers’ apps to interface with Facebook) available to third-party applications only on the condition that they refrain from developing competing functionalities and from connecting with or promoting other social networking services. The complaint goes on to allege that Facebook enforced these policies by cutting off API access to thwart perceived competitive threats from rivals.
The suit filed by the attorneys general contains similar allegations. There is also alignment in the remedies sought by both complaints. These could be far-reaching, with the following given as examples by the FTC: (i) the divestiture of assets, possibly requiring Facebook to unwind its Instagram and WhatsApp acquisitions; (ii) a prohibition on Facebook imposing anti-competitive conditions on software developers; and (iii) an obligation on Facebook to seek prior notice and approval for future deals. Facebook has responded to the suits, pointing out that both the Instagram and Whatsapp acquisitions were reviewed by relevant antitrust regulators at the time and were cleared. It states, “[n]ow, many years later…the agency is saying it got it wrong and wants a do-over.” Facebook argues that it faces competition in every aspect of its business and that its acquisitions have been “good for competition, good for advertisers and good for people”.
The complaints do not come without warning – FTC Chair Joseph Simons announced back in January that the commission was investigating the firm. The action fits with a wider push by the U.S. antitrust agencies, states and politicians to closely scrutinise the behaviour of Big Tech (two further suits by attorneys general have, for example, been filed against Google). Outside the U.S., Facebook is also facing antitrust challenges. A day after the U.S. suits were filed, the German Federal Cartel Office announced an investigation to examine whether the links between Oculus virtual reality products and the social network and Facebook platform could amount to an abuse of dominance. And with proposals being unveiled across the globe to introduce new rules to monitor the conduct of digital firms – see our article above – the focus on the digital sector looks set to continue.
ECJ annulment of Commission’s Paramount pay-TV decision gives third parties more weight in the commitments process
The European Court of Justice (ECJ) has annulled a 2016 European Commission decision to accept legally binding commitments from Paramount to stop enforcing territorial restrictions with broadcasters. The Commission had been investigating restrictions affecting the provision of pay-TV services under licenses between Sky and six U.S. movie studios since January 2014. In a 2015 statement of objections, the Commission set out its concerns that clauses in the licensing agreements, guaranteed by reciprocal obligations, meant a single pay-TV broadcaster was granted absolute territorial exclusivity in each EU member state. It alleged that this unlawfully eliminated cross-border competition between broadcasters. Paramount offered commitments to address these concerns. The commitments had a knock-on effect on third party broadcasters: Paramount no longer complied with or enforced the clauses in its distribution agreements with them. Groupe Canal +, in particular, lost its absolute territorial protection on the French market and, arguing that the commitments violated its third party rights, appealed the Commission’s decision right up to the ECJ.
We do not see many challenges to Commission commitments decisions and for this reason alone the ECJ’s ruling is important. But even more significantly, the judgment will impact the Commission’s future approach to accepting commitments and in particular the account it takes of third party interests. First, the ECJ dismissed as a solution the ability of third parties to enforce their contractual rights through litigation in national courts. It held that under EU law, those courts would simply not be able to adopt decisions which run counter to or conflict with Commission decisions. Second, the ECJ concluded that the Commission’s decision rendered the contractual rights of the third parties “meaningless” and therefore infringed the principle of proportionality. The Commission will no doubt study the ruling carefully. The judgment places a higher burden on the authority – going forward it will need to spend more time assessing the impact of proposed commitments on third parties, especially when contractual rights are involved. And, crucially, this could give such third parties a greater opportunity to more closely influence the final outcome. However, it is clear that the Commission values the ability to use the commitments mechanism to wrap up antitrust investigations more quickly and to remedy concerns. This benefits the parties under investigation too – particularly the lack of an ultimate infringement decision. Will the ECJ’s ruling lead to an overall dip in the volume of commitments cases? We expect not.
The Office of Competition and Consumer Protection (UOKiK) has fined two Veolia Polska group companies a total of PLN119.8m (approx. EUR26.8m) for colluding with PGNiG Termika to partition the heat energy market in Warsaw from 2014 to 2017. The UOKiK concluded that PGNIG Termika focused on generating heat while Veolia Energia Warszawa concentrated on selling it, and they jointly determined the structure of tariffs for end customers. The authority says that the collusion resulted in Warsaw residents paying excessive rates for heating their homes. At the same time, the authority imposed its first-ever sanction on an individual ‒ a then-President of the Management Board of Veolia Energia Warszawa, who it found “intentionally restricted” competition and was “directly responsible” for the infringement. The individual has been fined PLN200,000 (approx. EUR44,700). In comparison, both PGNiG Termika and its former president avoided fines of nearly PLN500m (approx. EUR109m) after the company reported the infringement under the UOKiK’s leniency programme and undertook “full-scale cooperation”.
UOKiK has had the ability to fine managers since 2015. At the time the new powers came into force UOKiK said it would only apply the provisions extremely rarely. And the fine is far lower than the maximum potential penalty of up to EUR500,000. But it could signal the start of an increased desire by the authority to pursue executives for their part in companies enacting anti-competitive agreements. This is suggested by a subsequent UOKiK press release ‒ in a bid to encourage individuals to blow the whistle on former employers, it reminds managers that they can be held liable for antitrust breaches even after leaving a company involved in anti-competitive practices. Certainly that would not be out of kilter with the approach taken in other jurisdictions. The UK’s Competition and Markets Authority, for example, has secured 20 director disqualifications relating to its investigations since 2016, most recently a seven-year disqualification period on a director of an estate agent. Last month we reported on the Hong Kong Competition Tribunal issuing its first ever director disqualification order against an individual. And in Australia this month a group of three banks and six senior banking executives were committed for trial in Federal Court on criminal cartel charges relating to trading in one of the bank’s shares. Each of the executives charged is alleged to have been knowingly concerned in some or all of the alleged conduct. If found guilty, the individuals could face sentences of up to ten years’ imprisonment, significant fines, or both.
UOKiK’s move to fine individuals is also in line with the authority’s generally more robust stance to enforcing Poland’s antitrust laws. This month it imposed its largest sanction for abuse of superior bargaining power to date. UOKiK fined Jeronimo Martins, the owner of the Biedronka network of stores, over PLN723m (approx. EUR163m) for using its market power to make suppliers, mainly of fruit and vegetables, accept unfavourable retroactive discounts. The authority claims to have other retail chains operating in Poland in its sights and encourages suppliers to report potential abuses to it.
European Commission completes current cycle of pay-for-delay probes with fines imposed on Teva and Cephalon
In the November edition of Antitrust in focus, we reported on the European Commission’s announcement that it has fined Teva and Cephalon EUR60.5m for agreeing to delay the entry of a generic sleep disorder drug (a so-called ‘pay-for-delay’ agreement). If you are interested in reading more about the case and the Commission’s continued focus on the pharmaceutical sector, see this commentary by Tom Masterman.