Antitrust in focus - November 2019
29 November 2019
- U.S. government confirms tough stance on rigging of government procurements with establishment of new “strike force”
- U.S. revises merger notification rules for foreign entities
- UK court provides valuable guidance on the assessment of antitrust damages awards
- European Commission investigating how a retail buying alliance could have facilitated cartel activity
- Joint Franco-German algorithms study concludes current antitrust rules are sufficient to address possible competitive concerns…for now
- Spanish antitrust authority fines national broadcasters EUR77.1m for anti-competitive TV advertisement practices
- Behavioural remedies ease three sets of audio-visual transactions through merger control clearance
- Car manufacturers face German FCO fines for anti-competitive steel purchases
- Colombia’s antitrust authority fines chlorine and sodium hydroxide cartels over USD30m
- FTC clears Bristol-Myers Squibb’s USD74bn acquisition of Celgene subject to largest-ever merger divestiture
For some time senior U.S. Department of Justice (DOJ) officials have warned that the DOJ’s Antitrust Division plans to be more aggressive in pressing criminal charges against both companies and individuals that have rigged U.S. government contract bids, domestically and internationally. Several cases have already borne fruit (military fuel supply, insulation installation contracts and online auctions for surplus government equipment), leading to corporate and individual guilty pleas and further indictments, as well as criminal fines and civil damages settlements totalling more than USD300m. Now, with the establishment earlier this month of the Procurement Collusion Strike Force (PCSF), the Division’s commitment “to ensure taxpayers the full benefits of competitive bidding” is confirmed. The PCSF is an interagency partnership (including the Federal Bureau of Investigation, the Department of Defense and others) designed specifically to deter, detect, investigate and prosecute criminal anti-competitive behaviour in government procurement, grant and programme funding. It will also train federal, state and local agency officials nationwide to recognise and report suspicious conduct. Our blog post provides more information on the PCSF and recent case developments and notes key takeaways which, given that foreign nationals are not immune, are applicable to all companies no matter where they are based.
The U.S. is not alone in its wish to deter and punish bid-rigging of government procurements. In the UK, for example, the Competition and Markets Authority has published information and a free ‘screening for cartels’ tool to help public sector procurers recognise and review their tender data for signs of illegal activity. The Portuguese authority has also been carrying out a “Fighting Bid Rigging in Public Procurement” campaign, under which, most recently, it raided the premises of undertakings in the private surveillance sector. In short, companies that contract with governments around the world should brace themselves for more enforcement action. Preparation should include a thorough review of compliance programmes and whistleblower processes.
The U.S. Federal Trade Commission (FTC) and Department of Justice (DOJ) have proposed amendments to the Hart-Scott-Rodino (HSR) Rules to clarify whether a transaction is exempt from premerger notification because the entity involved is foreign. Whether an entity is a foreign person or issuer often depends on the location of its “principal offices”. Though the term is not currently defined in the Rules, the Statements of Basis and Purpose issued at the time the agencies published the HSR Rules define principal offices as “that single location which the person regards as the headquarters office”. The amendments change this position by stipulating that an entity’s “principal offices” will be determined by the primary location of its executives and assets. More specifically, a corporation’s “principal offices” will be in the U.S. if: (i) ≥50% of the officers reside in the U.S.; (ii) ≥50% of the directors reside in the U.S.; or (iii) ≥50% of the company’s assets are located in the U.S. While there is some logic to these amendments, they do present some complexity, particularly for a buyer who may not have access to sufficient information on the location of the target issuer’s assets or the residency of its directors/officers to determine whether the target’s principal offices are foreign. That said, many non-U.S. transactions may also benefit from the so-called “look-through” exemption which does not take into account the “principal offices” of either party. Thus, as a practical matter, these changes will likely only impact deals involving non-controlling acquisitions by foreign persons of foreign issuers where the “look-through” exemption may not apply. We expect the amendments to take effect in early 2020.
UK-Dutch electricity interconnector operator BritNed’s claim for damages from ABB, stemming from the European Commission’s 2014 power cable cartel decision, was the first follow-on cartel damages case to proceed to final judgment in a UK court. In October 2018 the High Court ordered ABB to pay BritNed EUR13m (later reduced to EUR11m) given that the cartel had allowed it to maintain “baked-in inefficiencies” in its cable design, the costs of which had been passed on to BritNed. It also found that ABB had been able to achieve certain internal costs “cartel savings” as a result of not having to compete with its co-cartelists (see our alert). The award was a fraction of the over EUR180m claimed – the overcharge and loss of profits claims were unsuccessful. And BritNed’s woes have continued on appeal. The Court of Appeal has now set aside the controversial “cartel savings” element of the award as an error of law, concluding that ABB’s savings did not impact the price paid by BritNed or translate into a loss for which BritNed should be compensated.
But the Court of Appeal’s judgment is of much wider significance than this one case as, wrapping together EU and UK case law, it specifies in detail the approach to be taken when assessing cartel damages. Notably: (i) cartel damages in the UK must be compensatory, not punitive; (ii) there is no presumption of harm in cartel cases brought before the EU’s Damages Directive came into force and the burden of proof rests with claimants to establish that they have suffered loss and the quantum of that loss; (iii) a “broad axe” approach can be used to estimate damages; and (iv) it is not sufficient to look at the general effects of the cartel on the market rather than the specific amount of any overcharge. It is clear that the English courts are still willing to award damages for loss arising out of anti-competitive behaviour, even where the overcharge was unintentional. However, claimants face a high bar to prove the enormous losses typically alleged in follow-on cartel damages claims.
The full text of the judgment is not yet available online.
The European Commission has opened a formal antitrust probe into whether two large French grocery retail chains, Casino and Intermarché, have coordinated their conduct. While purchasing alliances can be pro-competitive, leading to lower prices or better quality products or services for consumers, the Commission is concerned that this alliance – a joint venture called INCA set up in November 2014 – went beyond its purpose, straying into anti-competitive behaviour. In particular, the Commission is investigating whether multiple contacts through the alliance were used as a channel to facilitate collusion on the development of shop networks and consumer pricing policies.
Is the Commission likely to target other alliances across the EU? It has been monitoring the sector since 2016, conducting dawn raids in February 2017 and May 2019 (inspection decisions which both Casino and Intermarché are appealing), and certainly believes that recent market developments – the growth in the number of purchasing agreements, as well as the changing composition of those partnerships – gives ample room for increased transparency and risks collusion. In addition, national antitrust authorities in the EU are investigating how purchasing partnerships between retailers could give them market power vis- à-vis suppliers of consumer goods. The Belgium Competition Authority conducted inspections in May and in 2018 the French authority opened inquiries to further investigate the competitive impact of a number of notified purchasing partnerships on the concerned markets, both upstream for suppliers and downstream for consumers. Retailers should therefore appraise their arrangements: do they have a purely pro-competitive purpose; are there sufficient checks to prevent employees straying off scope; and are adequate antitrust training and reporting procedures in place?
Antitrust authorities across the globe are grappling with the issue of how to assess (and address) possible antitrust risks associated with the use of algorithms. This forms part of a wider debate over whether current antitrust rules are fit for purpose in a rapidly developing digital age. A joint study prepared by the French and German antitrust authorities over the past one and a half years attempts to reach a common view, focusing in particular on algorithms and collusion. The study considers three scenarios:
- First, algorithms may be used to support "traditional" anti-competitive practices, for example by facilitating the implementation, monitoring or enforcement of the conduct. Here, the study says, the involvement of an algorithm does not raise specific antitrust issues, as prior contact between humans already exists and an anti-competitive agreement or concerted practice can be established. It might be advisable in this situation, however, for antitrust authorities to develop an understanding of the algorithm and how it works.
- In a second scenario a third party (such as an external consultant or software developer) provides the same algorithm or coordinated algorithms to rivals. While there is no direct contact between the rivals, the study concludes that a degree of "alignment" could nevertheless arise. It notes this alignment could take place "at data level", which could enable competitors to use the algorithm as a means for anti-competitive information exchange. Alternatively, there could be an alignment at "code level" – for example, the delegation of strategic decisions to the third party which uses the algorithm to make those decisions – which, according to the study, is likely to amount to a restriction of competition by object.
- Finally, the study discusses the parallel use of individual algorithms, noting that there is significant uncertainty over the extent to which algorithms can collude with each other. The paper concludes that it is too early to tell which potential types of interaction between algorithms could constitute illegal behaviour. A tricky question arising from this scenerio is when the behaviour of a self-learning algorithm can be attributed to a company. On the one hand, the study notes that algorithms could be treated in the same way as employees, with companies being liable for using an algorithm which engages in anti-competitive conduct. Another option would be to only find a company liable if it breaches a reasonable standard of care and foreseeability. The study does not appear to favour one approach over the other, although the head of the French antitrust authority Isabelle de Silva noted, when presenting the paper, that companies should consider that they are responsible for any algorithms they use, even if provided by a third party.
The study concludes by noting the challenges for antitrust authorities when investigating algorithms, suggesting that an in-depth analysis of the algorithm, including the relevant parts of the source code, could be useful. Finally, the paper notes that at the moment, the current antitrust framework, in particular EU antitrust rules, allows antitrust authorities to address possible competitive concerns. However, it points out that for the future, "it is not possible yet to predict whether there is a need to reconsider the current legal regime and the methodological toolkit and, if so, in what way". For now, the warning to businesses is clear – take care when introducing algorithms which may result in a form of collusion.
This initiative follows earlier joint Franco-German (Competition Law and Data, 2016) as well as French (Data-driven regulation by seven French regulators, 2019) and German (eg the "Competition and Consumer Protection in the Digital Economy" series) policy papers demonstrating a strong enforcement focus on the digital sector by both authorities (“A priority shared by both our authorities is to ensure open markets and effective competition in the digital economy”, Mundt, the German agency’s president, on the 8th Franco-German competition day 2018). This takes place alongside sector inquiries, eg into online advertising, on-going since 2018.
It can be viewed together with other antitrust developments in digital markets in the past month. Spain’s antitrust authority has raided real estate brokers on suspicion that they used algorithmic software to illegally fix commission rates, as well as information technology companies providing software to the real estate sector. In South Korea, the Korea Fair Trade Commission has established a task force to oversee potential anti-competitive behaviour in the information and communications technology sector. In Sweden, the antitrust authority has opened a sector study into digital platforms. We also note the UK’s Furman Report of March 2019, and G7’s Common Understanding on competition in the digital economy, published in July 2019. The focus on this sector shows no signs of abating.
Spain’s National Commission of Markets and Competition (CNMC) has fined Mediaset and Atresmedia EUR38.9m and EUR38.2m respectively for, independently of one another, imposing single-branding agreements and minimum purchase requirements on advertisers. This, concluded the CNMC, limited rival national, regional and pay-TV broadcasters’ ability to collect advertising revenue and so pushed them out of the television advertising market. In particular, the CNMC found that the companies charged advertisers a high minimum investment fee, amounting to a “significant percentage” of their total advertising campaign, and penalised advertisers that did not comply with the investment commitment. They paid bonuses to advertising agencies that reached a certain share of advertising on the companies’ channels. They also bundled channel packages so advertisers were forced to pay for advertising on less popular channels when buying advertising on a more highly viewed channel. The CNMC has concluded that these practices negatively impacted demand for audio-visual content in Spain and competition in the free-to-air television market, limiting the capacity of third party operators to acquire attractive audio-visual content that would allow them to improve their audience.
In addition to the fines, the CNMC has ordered the networks to end the anti-competitive conduct within three months and to provide it with documents on their future commercial offers and agreements. The companies, which had failed to convince the CNMC to close its investigation with commitments, plan to appeal, arguing among other points that the CNMC should have viewed the TV advertising sector as part of a much larger audio-visual advertisement market. The case signals the CNMC’s on-going interest in the media sector.
In general, antitrust authorities across the world favour structural divestments to deal with what would otherwise be anti-competitive mergers. However, as we found in our analysis of last year’s merger control trends, in practice they do resort to behavioural remedies, and not infrequently in transactions in the media and telecoms sectors. Three sets of conditional clearances this month provide confirmation.
First, following a phase 2 investigation, the European Commission has approved Telia’s acquisition of Bonnier Broadcasting, subject to compliance with a substantial package of behavioural remedies. The Commission’s concerns with the transaction relate to the fact that it would create a vertically integrated player in the audio-visual industry, combining a retail TV distributor (Telia) with the owner of important Finnish and Swedish TV channels (Bonnier Broadcasting). The Commission concluded that in Finland and Sweden the merged entity would deny Telia’s telecom and TV distribution rivals access to its streaming services, TV channels and advertising space on TV channels thereby forcing those companies out of the market. The remedies, which will remain in place for ten years, for the most part provide for access: to the merged entity’s free-to-air and basic pay-TV channels, as well as its premium pay-TV sports channels, through FRAND licences; to its streaming services and applications over the internet; and through a ban on discriminating in the sale of TV advertising space on its channels. In addition, the Commission has demanded the maintenance of information barriers between the merged entity’s wholesale and retail businesses to protect competitors’ confidential information.
Second, the Korea Fair Trade Commission (KFTC) has approved two separate large media mergers with behavioural conditions: the combination of South Korea’s third largest telecom operator, LG Uplus, and its largest cable-TV operator, CJ Hello, and the merger between its second largest telecom operator, SK Telecom, and its second largest cable-TV operator, t-broad. To address a number of antitrust concerns resulting from the parties’ strengthened market positions, the behavioural remedies imposed on both deals prohibit price increases in cable-TV subscription fees exceeding the annual consumer price inflation rate, any reduction in the number of cable TV channels being offered to subscribers and refusing to renew contracts or coercing subscribers into switching to more expensive contracts. The conditions will remain in place until 2022. In the meantime, the industry should take note that the KFTC plans to cooperate with other South Korean government agencies in discussing policy changes relating to pay-TV market players’ transactions with small and mid-sized rivals and TV home shopping channel operators.
Third, back in Europe, the Italian antitrust authority (IAA) has conditionally cleared Italian infrastructure fund manager F2i’s proposed acquisition of television broadcast networks operator Persidera. Concerned that the merger might harm competition in the market for television broadcasting infrastructure, digital broadcasting, free television, pay-TV and television advertising, the authority has imposed a complex, detailed set of behavioural remedies that will remain in place indefinitely. These include an obligation to provide access to and supply hospitality services on fair, reasonable and non-discriminatory terms and amendments to Persidera’s board composition and shareholders’ agreement to limit Mediaset’s access to sensitive information and influence. Interestingly, the IAA has opted for the provision of annual reports over the appointment of a monitoring trustee. In addition, it will be open to any third parties disputing the terms of access to infrastructure to commence mediation proceedings before the Chamber of Commerce of Milan.
The Polish Office of Competition and Consumer Protection (UOKiK) has fined Engie PLN172m (EUR40m) for “persistently and unreasonably” refusing to provide it with documents and data relating to contracts with Gazprom. The information was requested as part of precedent-setting enforcement proceedings. Since April 2018, UOKiK has been investigating whether six companies – Gazprom, Engie, Uniper, OMV, Shell and Wintershall – finalised a transaction for the Nord Stream 2 gas pipeline without its consent. The consortium had withdrawn its merger control filing in 2016 after receiving negative feedback from the authority, but UOKiK is concerned that the companies then tried to circumvent the regulations by establishing a company financing the construction of the pipeline without its consent. According to UOKiK, both the creation of the joint venture and the conclusion of the subsequent agreements had the same purpose: the financing of the construction of Nord Stream 2.
Engie is reportedly appealing the fine. The amount is substantial and, at over EUR40m, is a significant way towards the statutory maximum for non-cooperation of EUR50m. It far surpasses the previous highest fine imposed for investigation obstruction (EUR440,000 on Inco Veritas in 2011 for deleting a computer file during a dawn raid). Claiming that Engie’s conduct significantly delayed its enforcement investigation, UOKiK stated that it took account of the importance of the withheld information, as well as the “intentional conduct” of the company. As we noted in our September article on increased CEE antitrust enforcement, we expect the regulator to impose fines towards the upper limit both on companies and on individuals for antitrust violations.
The proposed merger between U.S. banks BB&T Corporation and SunTrust Banks, Inc. has cleared a significant regulatory hurdle. But the U.S. Department of Justice’s (DOJ) approval of the deal has come at a price: the divestiture of 28 branches across seven local markets in North Carolina, Virginia and Georgia – which First Horizon Bank has agreed to buy. The DOJ required the sale of the branch offices and entire customer relationships (ie all deposits and loans) associated with the divestiture branches, in all adding up to around USD2.3bn in deposits and USD410m in loans. Noting that “banks and the financial sector are at the heart of [the U.S.] economy”, Assistant Attorney General Makan Delrahim is satisfied that this settlement resolves antitrust concerns around access to competitively priced products, including small business loans, while ensuring merger-related investments in innovation and technology. Interestingly, the DOJ’s review of the competitive impact of the merger appears to have continued to focus on local market overlaps despite the growth in online banking.
Of course, mergers in the banking industry in most jurisdictions can generally only complete after passing through a number of regulatory hoops, of which merger control is just one. The BB&T/SunTrust deal, which would create the sixth-largest U.S. bank, has subsequently also been cleared by the U.S. Federal Reserve Board and the Federal Deposit Insurance Corporation Board of Governors – subject to the divestment of 30 branches and more than USD2.4bn in deposits – as well as the North Carolina Commissioner of Banks.
Purchasing practices have come under scrutiny by antitrust authorities this month. We reported above on the European Commission’s investigation into a retail buying alliance. In Germany, the Federal Cartel Office (FCO) has fined car manufacturers BMW, Daimler and Volkswagen around EUR100m for anti-competitive practices in the purchase of long steel products (while closing the files on the originally equally investigated first-tier suppliers). Long steel is an important material in the car production process – it is used to make many different car parts. The FCO found that, over a nine-year period, representatives of the car makers met twice a year with steel manufacturers, forging companies and large systems suppliers, and exchanged information on uniform surcharges for the purchase of long steel products. These talks, concluded the FCO, meant that the surcharges were not negotiated individually with each supplier – price competition between the companies was therefore “eradicated”. The car companies admitted the facts and agreed to settle with the FCO. They also cooperated with the authority throughout the investigation. The settlement and cooperation were both taken into account when calculating the fines.
The steel sector has been a focus of the German Federal Cartel Office (FCO) in recent years. In separate proceedings, for example, the FCO has been investigating manufacturers of stainless, specialty steel products and quarto plates – fines of EUR205m were imposed in the stainless steel case, in July 2018, with probes against manufacturers in other steel segments and a trade association still on-going. And on the same day as the FCO announced the fines on the car makers, steel producer Schmolz + Bickenbach reported that it had reached a settlement with the FCO, agreeing to pay a EUR12.3m penalty over allegations of anti-competitive conduct. More action is expected from the FCO in this sector.
This month Colombia’s antitrust authority (SIC) fined four chemical companies for participating in cartels. Brinsa and Quimpac were hit with penalties of around COP33.5bn (USD9.8m) and COP41.5bn (USD12.5m) respectively for participating in a cartel in Colombia’s chlorine market. They were also fined, together with Trichem and Mexichem (now called Orbia), for anti-competitive activity in the country’s sodium hydroxide market – penalties reached COP49.4bn (USD14.5m) in aggregate. In addition, 13 individuals associated with the companies were fined a total of around COP492.7m (USD145,000) in relation to each cartel for “facilitating, authorising, executing or tolerating” the anti-competitive conduct. The SIC concluded that the chlorine cartel operated between 2002 and 2014 and allocated customers, defrauding and misleading national water and sewage companies that use chlorine to treat and purify water. In the sodium hydroxide case, the SIC found that the four companies agreed on Mexichem’s coordinated exit from the Colombian market with the redistribution of its market share between Brinsa and Trichem. They also adopted other practices aimed at preventing market entry and expansion of new competitors.
How the SIC approached Brinsa’s leniency application is of note. Brinsa and its associated individuals were exempted from paying the fines imposed in the sodium hydroxide cartel, winning immunity after admitting the company’s participation in the anti-competitive conduct and cooperating with the SIC’s investigation. However, Brinsa only received a fine reduction for the chlorine cartel. SIC stripped the company of full immunity because during the course of the investigation it openly disputed facts that it had previously acknowledged when reporting the cartel, in particular relating to the duration of the infringement.
The U.S. Federal Trade Commission (FTC) has ordered a remedy to resolve concerns that BMS’s USD74bn acquisition of Celgene would harm consumers in the U.S. market for oral treatments for moderate-to-severe psoriasis. In particular, the FTC alleges that the deal would create a monopoly by eliminating future competition between the parties – that, absent the transaction, BMS’s pipeline product, considered the most advanced oral treatment for the condition, would likely be the next market entrant and compete directly with Celgene-owned Otezla, the most popular oral treatment in the U.S. And market entry would not address the antitrust concerns as any new competitors would face lengthy delays for both drug development and FDA approval.
Unsurprisingly the FTC has sought a structural remedy. These are common in U.S. life sciences mergers involving drug portfolio overlaps. But the solution stands out as amounting to the largest divestiture that the FTC or the U.S. Department of Justice has ever required in a merger enforcement matter: the sale of Celgene’s worldwide Otezla business, including its regulatory approvals, intellectual property, contracts and inventory, for USD13.4bn to Amgen within ten days of completion. Interestingly, though the parties shared a market-to-pipeline overlap, they were required to divest Celgene’s much more lucrative on-market product instead of BMS’s pipeline product. The proposed consent order also provides for FTC monitoring and a potential divestment trustee, which are common in U.S. upfront buyer remedies. Also of note, the FTC vote to accept the order was three to two, with the two Democratic Commissioners ruing what they consider to be a failure to adequately review the competitive effect of the merger and the limits to the FTC’s current analytical approach of addressing pharmaceutical mergers solely on the basis of drug-to-drug overlaps.