Antitrust in focus - July 2020
31 July 2020
This newsletter is our take on the antitrust developments we think are most interesting to your business.
Yvo de Vries, partner based in Amsterdam, is our editor for this edition. He has selected:
- UK musical instruments cases prompt CMA to develop a price monitoring tool to detect suspicious activity
- European Commission launches sector inquiry into Internet of Things
- New UK regulatory regime for online platforms on the cards following market study final report
There is an increasing and pressing desire from politicians and society at large for businesses to find solutions to fix environmental and climate issues. Pressure will mount as governments look to find sustainable ways for economies to recover from the Covid-19 pandemic. However, antitrust laws are often seen as a stumbling block – in particular to companies wishing to collaborate on sustainability. Without clear guidance on where antitrust authorities draw the line between legal and illegal cooperation, projects/initiatives aimed at benefiting the environment may fail to get off the ground amidst boardroom fears of antitrust enforcement. Keen to dispel such concerns, the Netherlands Authority for Consumers and Markets (ACM) this month issued for consultation revised draft guidelines on how it will evaluate these types of agreement for compliance with EU and Dutch antitrust rules. Going forward, the ACM plans to exempt agreements where any competitive harm to users (such as a price rise) is equal to or outweighed by wider environmental benefits to society as a whole (such as lower carbon emissions) as well as to the companies’ customers. It intends to simplify the analysis requirement where the combined market share of the businesses entering into the agreement is less than 30% – companies will only have to outline all the benefits and disadvantages of the collaboration, rather than carry out a full quantitative analysis. And it will not look to sanction parties that have followed the guidelines in good faith but ultimately do not meet all the conditions, and that expeditiously adjust agreements at the ACM’s request.
The European Commission has also picked up the baton. It says it fully supports the need for clear guidance on agreements aimed at reducing greenhouse gas emissions that would be compatible with antitrust law. It is looking into the issues as part of a review of two horizontal block exemption regulations and related guidelines, and promises further clarity and a uniform approach across the EU. Indeed, at a conference on sustainability in October 2019, Margrethe Vestager invited businesses to approach the Commission for guidance in specific cases. In turn, such discussions will provide it with material to prepare more general guidance. In the UK, the Competition and Markets Authority too plans “to communicate better to ensure that businesses engaged in sustainability initiatives know how to comply with competition law and do not unnecessarily shy away from those initiatives on the basis of unfounded fears of being in breach of competition law”.
However, there remains no doubt that antitrust authorities will still come down hard on businesses using sustainability agreements as a cover for cartels and, as the ACM has put it, to prevent “greenwashing”. This is most clearly evidenced by an ongoing Commission probe into Daimler, BMW and VW for allegedly colluding to restrict the development of clean car emissions technology.
Micro, small and start-up companies win relief as Commission continues to adapt State aid regime to account for Covid-19
At the end of June, the European Commission made another amendment to its Temporary State Aid Framework – the third since its adoption in March (see our April and May alerts on the earlier developments). The latest extension:
- Is a boost for micro and small companies – those with less than 50 employees and less than EUR10m of annual turnover and/or annual balance sheet total – and by extension many start-ups, all of which have been particularly knocked by the pandemic-induced liquidity shortage. Member States can now provide them with public support under the Temporary Framework, even if they were already in financial difficulty on 31 December 2019, provided they are not in insolvency proceedings, have not received rescue aid that remains unpaid, and are not subject to a restructuring plan under State aid rules.
- Introduces incentives for private investors to participate alongside the State in coronavirus-related recapitalisations – a bid to reduce the need for State aid and the risk of competition distortions. Now, for example, if the State decides to grant recapitalisation aid, but private investors make a significant contribution to the capital increase (in principle at least 30% of the new equity injected) on the same conditions as the State, the acquisition ban and the cap on management remuneration are limited to three years. The dividend ban is also lifted for new and existing shareholders, provided the holders of the existing shares are altogether diluted to below 10% in the company.
- Clarifies that aid should not be conditioned on the relocation of the production activity or of another activity of the beneficiary from another EEA country to the territory of the Member State granting the aid. This is a move designed to protect the much-cherished single EU market.
And the Commission has not stopped there. This month, with the coronavirus outbreak restricting its ongoing “fitness check” of a number of the State aid rules, the Commission has prolonged many that would otherwise have expired at the end of 2020 (including the regional State aid guidelines, the General Block Exemption Regulation and the de minimis Regulation). It has also adopted targeted adjustments to the existing rules to mitigate the impact of the pandemic.
Finally, the Commission has taken action against tax avoidance and the use of tax havens, recommending that Member States do not grant financial support to companies with links to countries that are on the EU’s list of non-cooperative tax jurisdictions, and that restrictions should apply to companies that have been convicted of serious financial crimes. The Commission is requiring Member States to inform it of the measures they will implement to comply, and will publish a report on the impact of the recommendation within three years.
You can keep on top of all the Commission’s Covid-19-related State aid decisions through our overview here. You can also get updates on the impact of the pandemic across the globe via our antitrust enforcement, merger control and foreign investment control trackers.
Commission suffers State aid defeat as General Court overturns its landmark Apple tax rulings decision
The Commission has not had a particularly high success rate in appeals against State aid decisions in the past couple of years. Late last year, for example, it saw its decision that the Netherlands granted illegal State aid to Starbucks overturned by the General Court (see our September edition of Antitrust in focus for more details). The Commission has now suffered another resounding defeat – the General Court has annulled its 2016 decision that two tax rulings issued by the Irish tax authorities in favour of Apple constituted illegal State aid. The Commission had found that the tax rulings “substantially and artificially lowered the tax paid by Apple in Ireland” over a particular period. This, said the Commission, amounted to tax benefits to the tune of EUR13bn, which it required Ireland to recover from Apple. Both Apple and Ireland appealed.
While it endorsed the Commission’s framework for assessing the tax rulings, the General Court ultimately found that the Commission did not prove its case to the requisite legal standard. In particular, it held that the Commission was wrong to find that Apple had been granted a “selective advantage” (ie a benefit targeted at a particular business or type of firm, sector or location). First, the Commission incorrectly concluded that Apple was granted an advantage as a result of the Irish tax authorities not allocating the Apple IP licences (and therefore trading income) to its Irish branches. Second, the Commission did not demonstrate that methodological errors in the tax rulings would have led to a reduction in Apple’s chargeable profits in Ireland. Finally, the Court held that the Commission did not prove that the tax rulings were the result of discretion exercised by the Irish tax authorities.
Unsurprisingly, both Ireland and Apple have welcomed the ruling. Commissioner Vestager notes that the Commission will carefully study it. But she is clear that the Commission’s scrutiny in this area will not wane: it “will continue to look at aggressive tax planning measures” and “stands fully behind the objective that all companies should pay their fair share of tax”. With a number of investigations into tax rulings ongoing, and appeals of Commission decisions pending, it is fair to say that this case will not be the last word on the subject – expect more to come.
The majority of cartel cases involve collusion on the market for the supply of a product or service, a classic example being coordination of selling prices. But we are seeing an increasing amount of enforcement action focused on the conduct of firms on the purchasing market, in particular relating to suspicions of purchase price coordination. This month there have been fines in two such cases:
- The European Commission has fined three firms EUR260m for coordinating their price negotiation strategy for ethylene purchases. The Commission found that the aim of the collusion was to push down an industry price reference for ethylene, which is often used as a benchmark in supply agreements, in order to buy the chemical at the lowest possible price. The firms also exchanged price-related information. A fourth company received full immunity for revealing the cartel.
- The French Competition Authority (FCA) has sanctioned 12 ham and cold meat companies. Like the ethylene cartel, the firms coordinated their negotiations with suppliers (slaughterhouses) in order to resist price increases or obtain price reductions on specific products. The cartel also impacted the downstream market – the companies fixed the price increases that they intended to charge mass-market retailers for certain products. Fines totalled EUR93m. Two of the companies approached the FCA under the leniency programme, but the FCA refused to grant full immunity to the first to come forward as it failed to declare a meeting which one of its employees attended – a clear warning that full disclosure to the authority is a strict condition in order to secure maximum benefit.
More enforcement action into anti-competitive conduct on purchasing markets is underway in a number of jurisdictions. The Commission opened a probe into a French retail buying alliance in November 2019 and carried out dawn raids at the premises of companies active in styrene monomer purchasing in June 2018. And both the FCA and the Belgian antitrust authority have ongoing investigations (see our earlier Antitrust in focus article for more details). Finally, it is notable that both the Commission and the FCA made allowances for the current economic climate when considering the fines in the two cases. The Commission granted the ethylene purchasers an additional three months to pay the amounts due to the impact of Covid-19. The FCA took into account the “difficult economic situation in the cold meat sector and the individual financial difficulties experienced by some companies” in setting the level of the fine. It would not be surprising to see more of these types of concession in future cases as the economic impact of the pandemic continues.
The new U.S. Vertical Merger Guidelines were much anticipated, not least because the previous version – issued by the Department of Justice (DOJ) – dated from 1984, was widely considered to be out of date. The DOJ has now teamed up with the Federal Trade Commission (FTC) to revise and reissue the guidelines. The aim is to “provide greater transparency and predictability” about how the agencies will assess the likely competitive impact of vertical deals, including the techniques and types of evidence they will use in their analysis. The guidelines acknowledge that vertical mergers often benefit consumers, particularly as a result of the “elimination of double marginalisation” (ie a vertically integrated firm which self-supplies inputs will lower its costs as it will avoid paying a mark-up to an independent supplier). But they also state that such deals are not always innocuous. The guidelines in particular discuss and give examples of how vertical deals may increase a merged firm’s incentive or ability to raise its rivals’ costs, or to foreclose competitors from the market.
For the most part, the guidelines put into writing the practice of the U.S. agencies towards vertical mergers in recent years. So there is nothing particularly groundbreaking in their content. However, the guidelines have not been without controversy. In what appears to be a response to public comment, the final version does not contain the “safe harbour” that we saw in January’s draft. This provided that the agencies were unlikely to challenge a vertical merger where the parties have a market share of less than 20%. It received much criticism – some arguing the bar was set too low and would subject deals to scrutiny that were unlikely to raise issues, and some advocating the threshold was too high, meaning anti-competitive mergers could slip through the net. The fact that it has been dropped does not, therefore, come as too much of a surprise. Interestingly, the guidelines also caused a divide at FTC-level. In line with a trend we have seen in U.S. merger enforcement in the past 18 months, the FTC’s vote was split, with the two Democratic appointees dissenting (see our Global trends in merger control enforcement report for more on this). Both were of the view that the guidelines overemphasise the benefits of vertical mergers. It is therefore possible that the application of the guidelines by the FTC in future cases may lead to further dissenting views. Finally, it is important to note that the guidelines are not binding on the U.S. courts. The DOJ’s landmark defeat last year in its first challenge to a purely vertical merger in 40 years – AT&T/Time Warner – shows that the agencies face a rather high bar to prove that a vertical deal is in fact anti-competitive.
The U.S. Federal Trade Commission and the U.S. Department of Justice Antitrust Division issue an annual Hart-Scott-Rodino Annual Report. The report for fiscal year 2019 was published this month. While the number of notified transactions dropped slightly compared to the previous fiscal year, merger enforcement levels were up with the antitrust agencies issuing Second Requests in 3% of notified transactions and most of those cases requiring remedies. The agencies also brought two civil enforcement actions for violations of notification and waiting period requirements, reflecting the agencies’ continued focus on merger control compliance. See our more detailed summary of the report here.
UK musical instruments cases prompt CMA to develop a price monitoring tool to detect suspicious activity
Tackling resale price maintenance (RPM) continues to be a key enforcement priority for antitrust authorities. In the UK, the Competition and Markets Authority (CMA) has wrapped up three separate RPM probes in the musical instruments sector. First, Roland was fined just over GBP4m for setting minimum prices for Roland-branded electronic drum kits. At the same time, the CMA fined Korg around GBP1.5m for setting minimum prices of hi-tech music equipment and synthesisers. Just a couple of weeks later, the CMA issued its infringement decision against retailer GAK for engaging in RPM with Yamaha, finding that the firms agreed that GAK would not discount certain Yamaha instruments below a minimum price. GAK was fined nearly GBP280,000 while Yamaha escaped a penalty after reporting the conduct. The decisions are interesting for several reasons:
- They follow hot on the heels of two earlier RPM decisions to fine musical instrument makers Casio and Fender a total of EUR13.7m. Given the prevalence of RPM in the sector, the CMA has launched a targeted compliance campaign, publishing an open letter and guidance to suppliers and retailers, as well as sending warning letters to nearly 70 individual suppliers/retailers.
- In a number of these cases, the suppliers used price monitoring software to ensure that retailers were not selling below the agreed price. Retailers also used this software to track their rivals’ prices, and reported them to the supplier if they broke the minimum price arrangement. This gave the CMA the idea that it, too, could monitor online prices. The authority has therefore developed its own price monitoring tool to help it detect suspicious online pricing activity. The tool will be used in the musical instruments sector in the first instance, with the aim being to roll it out to other sectors in the future.
- The GAK/Yamaha case marks the first time that the CMA has brought enforcement action against a retailer for RPM – all other action has focussed solely on the supplier(s). It will be interesting to see whether we see retailers being similarly targeted in future RPM probes.
- In each case, the fines were reduced by 20% under the CMA’s settlement procedure, showing the clear benefits of admitting the infringement and cooperating with the CMA. However, Roland and Korg’s fines were both increased (by 15% and 10%, respectively) due to the involvement of senior management in the conduct, plus a further 10% for intentionally breaching the antitrust rules. In the case of GAK, an uplift of 15% was applied because GAK continued the illegal conduct after it was warned by the CMA in 2015.
The CMA is not the only antitrust authority to use digital means in an attempt to better detect online antitrust infringements – in Brazil, Mexico, the Netherlands, Russia, South Korea and Sweden, for example, authorities are making use of digital tools to screen for possible collusion. Nor is the CMA alone in its pursuit of RPM. An Austrian court has found that Yamaha engaged in illegal pricing agreements with Austrian dealers – Yamaha again escaped fines under the leniency regime. It also separately fined a pool cleaning equipment firm for engaging in RPM with wholesalers and retailers. Elsewhere, in the last couple of months we have seen fines handed out to a sports equipment firm and an e-cigarettes company by the the Czech antitrust authority, the Australian ACCC reject a proposal by a power tools maker to set a minimum advertised price, and the Finnish authority seek a EUR9m fine against a hardware supplier.
Margrethe Vestager’s mission letter for her second term as Competition Commissioner was clear that she “should consider using the tool of sector inquiries into new and emerging markets”. We therefore knew that a sector inquiry was imminent, most likely in the digital sector. The details have now been revealed: the European Commission has launched an inquiry into the Internet of Things (IoT). The focus is on consumer-related products and services that are connected to a network and can be controlled at a distance (eg by voice assistance or mobile device). This includes smart home appliances – fridges, smart TVs, lighting systems – and wearable devices, such as fitness trackers and smart watches. And, as a separate strand, the Commission will look at services available via smart devices, including music/video streaming services and the voice assistants that access them.
The Commission notes that the IoT sector for these products is in the early stages of development in the EU. But it has already seen indications that certain practices may “structurally distort competition”. These centre in particular on the use of data, and include restrictions on access to data and interoperability, the emergence of digital ecosystems and gatekeepers, and forms of self-preferencing and practices linked to the use of proprietary standards. The sector inquiry will enable the Commission to collect market information to better understand these issues, and consider whether they create antitrust problems. It has already sent out (reportedly lengthy) questionnaires to market players to start this process.
Unlike other antitrust authorities, such as the UK’s CMA, the Commission does not frequently use its sector inquiry powers. In fact, in the past 15 years, it has only completed five: retail banking, insurance, pharmaceuticals, energy and, most recently, e-commerce. Sector inquiries are resource intensive and usually take around two years to complete – the Commission aims to publish a preliminary report on the IoT inquiry in spring 2021, with the final report in summer 2022. The Commission’s powers at the end of a sector inquiry are relatively limited. It can make recommendations for regulatory reform or, as we have seen it do a number of times following its pharmaceutical and e-commerce inquiries, open individual antitrust enforcement investigations. Recent developments, however, show the Commission’s desire for a regime with more teeth. As we reported in June, the Commission has proposed a new competition tool that would allow it to address structural competition problems in markets (ie by imposing behavioural and in some cases structural remedies) without finding an infringement of EU antitrust rules. For the time being, though, the Commission must rely on its existing powers, which we expect it to make use of to their full extent, during the IoT inquiry.
The UK Competition and Markets Authority (CMA) has made recommendations to the UK Government for a new regulatory regime to police the behaviour of digital platforms and make “pro-competitive” interventions. Early this month, the CMA released the final report in its market study into online platforms and digital advertising, identifying a number of concerns over the way that the market operates. Rather than use existing powers to address the concerns, the CMA has instead proposed a regulatory approach. Closely modelled on the recommendations set out in the 2019 Furman Report, the new regime would subject certain digital platforms – designated as having “strategic market status” – to a code of conduct, enforceable by a new Digital Markets Unit. This Unit would also be able to intervene to tackle the sources of market power, including by, most radically, ordering the separation of platforms. Read our alert for the full download of what you need to know.
Since May 2017, the European Commission has been investigating concerns that Aspen abused a dominant position by charging excessive prices for six critical off-patent prescription cancer medicines. This month, in a surprise move, and despite building up quite a case against the company, it has opted to potentially forego an infringement decision and fine in favour of a speedier resolution – it is consulting on broad and fairly long-lasting commitments offered by Aspen to change its pricing practices. It is a pragmatic approach that has been welcomed by the EU consumer group BEUC. It should also allow Aspen to draw a line under public enforcement in the EU, if not private damages actions, and mirrors the company’s decision to settle a UK Competition and Markets Authority (CMA) investigation, concluded this month, into its sharing of the UK fludrocortisone market with Amilco and Tiofarma. In that probe, Aspen in addition committed to ensure two suppliers of the drug in the UK and made a GBP8m settlement directly to the NHS.
The EU investigation is the Commission’s first pure excessive pricing case in the pharmaceutical sector. The Commission claims that, after acquiring the medicines in 2009, Aspen increased its prices, initially in Estonia, Germany, Latvia, Lithuania, Poland, Sweden and the UK, and then across other countries in Europe. The authority also came to the provisional conclusion that Aspen as a result consistently earned very high profits, both in absolute terms and when compared with the profit levels of similar companies in the industry. The Commission suspects that the price rises cannot be justified – the medicines have been off-patent for 50 years (ie all investment will have been recouped) and the price increases were disproportionate to the slight rise in Aspen’s unit costs. In addition, the Commission notes that patients and doctors had mostly no alternatives to using Aspen’s medicines. It calls the company out for threatening to withdraw the medicines when national authorities tried to resist the increases.
While perhaps lacking the impact of a headline-grabbing fine, the commitments are still potentially groundbreaking:
- Aspen proposes to reduce its prices across the EEA for the six cancer medicines by, on average, around 73%.
- These prices will be the maximum that Aspen can charge for the next ten years (subject to one possible review of the net price ceilings if Aspen’s costs increase by at least 20%) and, unusually, will start taking effect retroactively via rebates – as of 1 October 2019 (when Aspen concretely proposed commitments to the Commission).
- Aspen has also offered to guarantee the supply of the medicines for the next five years and, for an additional five-year period, will either continue to supply or make its marketing authorisation available to other suppliers.
Overall, this is a complex set of undertakings covering multiple drugs and countries, with only Italy carved out on account of the Italian antitrust authority adopting its own decision for the Italian market in 2016 (upheld in March 2020), ordering Aspen to reduce its prices and pay a fine of EUR5.2m. The pharmaceutical industry would certainly benefit from some more general Commission guidance on its approach to analysing excessive prices should the case be resolved in this way. In the meantime, in the UK, the CMA is ploughing on with its excessive and unfair pricing probes in the sector. It welcomed the Court of Appeal’s March ruling in its phenytoin case and, most recently, sent a supplementary statement of objections to Advanz Pharma (formally Concordia) claiming that the firm charged the NHS excessive and unfair prices for a thyroid treatment.
A&O antitrust team in publication
Recent publications by members of our global antitrust team include:
- Francesca Miotto (Counsel, Brussels) and Nele De Backer (Associate, Brussels): Analytical framework under Article 101 of the TFEU: guidance arising from recent ‘pay-for-delay’ CJEU proceedings, 9 July 2020, reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com.