On the cusp of the UK merger control regime standing separate to the EU regime on 1 January 2020, the UK’s Competition and Markets Authority (CMA) has launched a major review of its merger guidelines. First it published for consultation draft revised guidance on its jurisdiction to review mergers and the procedures for those reviews as well as draft revised guidance on the operation of its ‘mergers intelligence function’ (the CMA division which decides whether to open an investigation into potentially problematic mergers on its own initiative). The UK regime is voluntary, but the CMA’s increasingly tough approach is well-known and now more fully reflected in the draft guidelines. Our alert takes a look at the CMA’s:

increasingly expansive approach to establishing jurisdiction – its willingness to review acquisitions of minority stakes and its broad application of the ‘share of supply’ test;
use and enforcement of initial enforcement orders (IEOs) preventing parties from integrating their businesses during a CMA review – the CMA has notched up a tally of fines for breaches of these ‘freeze orders’. Even more recent is the Competition Appeal Tribunal (CAT) ruling upholding the CMA’s decision to refuse a derogation to an IEO imposed in relation to Facebook/Giphy – the CMA considers that the judgment “endorses the CMA’s cautious approach to assessing derogation requests at an early stage in its investigation, and stresses the importance for merging companies to engage with the CMA when seeking a derogation”; and
proposed approach to multi-jurisdictional mergers and remedies – new sections to the guidelines set out its preference for aligning the timetables of parallel investigations and note that the CMA may decide not to open an investigation on its own initiative where any remedies agreed in merger control proceedings in another jurisdiction are likely to address any UK concerns.

Hot on the heels of that consultation, the CMA has also published a draft of revised merger assessment guidelines for consultation. Most significantly, the revised version takes account of the digital transformation that has taken place in the ten years since the last guidance was published. There are, however, other changes of broader application. We take a look at the key policy themes that have been refreshed, clarified and in some cases modified in this alert. The CMA’s approach to assessing mergers in the context of the current Covid-19 pandemic has, however, taken a knock. This month the CAT quashed its JD Sports/Footasylum final report in so far as its conclusions were based on the CMA’s assessment of the likely effects of the pandemic on the relevant markets, the merging parties/merged entity and the competitive constraints likely to apply to the merging parties/merged entity. While generally endorsing the CMA’s approach to assessing the effects of the merger, the CAT considered that the CMA’s approach to gathering information about the specific impact of the pandemic was irrational. The CAT criticised the CMA’s failure to follow up inquiries with suppliers and its failure to make direct inquiries of Footasylum’s primary lender. Similarly, it considers the CMA acted irrationally in coming to conclusions as to the possible effects of the pandemic on the ability and incentives of Nike and adidas to increase their direct-to-consumer operations to the disadvantage of the merged entity, without the necessary evidence. The CMA is considering whether to appeal, noting that its decision about the likely future effects of the merger was undertaken in the context of great uncertainty about the longer term impact of Covid-19 on the retail sector and after concluding that updated supplier and bank forecasts “would have been speculative and unreliable evidence”.

UK government maps out new course for scrutiny of investment in the UK

The UK Government’s National Security and Investment Bill (Bill) – published this month together with a host of policy papers – is ground-breaking. It will drastically expand the Government’s powers to scrutinise investment on national security grounds through:

a requirement for mandatory suspensory notification of transactions in certain sensitive sectors: civil nuclear, communications, defence, data infrastructure, energy, transport, AI, autonomous robotics, computing hardware, cryptographic authentication, advanced materials, quantum technologies, engineering biology, military or dual-use technologies, satellite and space technologies and critical suppliers to the Government and emergency services (precise definitions for the sectors/types of sector entity that could fall within the mandatory regime remain to be finalised with a consultation ongoing until 6 January); and
a “call-in” power and voluntary notification applying to an extremely wide range of transactions (including acquisitions of land and intellectual property) across all sectors of the economy. The power has a limitation period of five years, reduced to six months where a transaction is voluntarily notified to the Government.

For both mandatory notification and the call-in power, there are no turnover or market share thresholds. The target need only carry on activities or supply customers in the UK.

Significantly, the Bill has immediate implications for on-going transactions, because the call-in power will apply retrospectively to any transaction that has not completed before 12 November 2020. While this power will not be exercisable until the Bill has been passed and commenced, parties may need to consider whether to engage with the Government to understand the risk of a retrospective call-in after that date. Our alert details the transactions that are potentially on the hook, the key steps in the Government’s review process, the potential outcomes and the consequences of non-compliance (also see this version for the impact on energy and infrastructure).

The UK is just the latest in a string of jurisdictions across the globe that have been taking steps to strengthen their foreign investment control regimes - see our tracker for amendments made in response to the Covid-19 pandemic.

DOJ challenges Visa’s acquisition of nascent competitor Plaid, referencing hot internal documents

The U.S. Department of Justice (DOJ) has sued to block Visa’s USD5.3 billion acquisition of Plaid. The move reflects the DOJ’s commitment to rooting out killer acquisitions: the complaint alleges that the acquisition would eliminate “a nascent competitor developing a disruptive, lower-cost option for online debit payments”. Indeed, although Plaid does not currently compete with Visa, its technology and strong and numerous connections to fintech apps means the fintech company is well-set to build a bank-linked payments network, allowing consumers to pay merchants directly from their bank accounts using bank credentials rather than a debit card. The DOJ’s concern is that the acquisition would deprive merchants and consumers of an independent innovative alternative to Visa, which it considers to be a monopolist in online debit services, and increase entry barriers for future innovators. Interestingly, in August the UK Competition and Markets Authority cleared the deal after its phase 1 review found that Plaid is only one of a number of payment initiation service (PIS) providers active in the UK, and that a combined Visa-Plaid business would not have the ability to push other PIS providers out of the market.

The DOJ’s complaint also highlights the dangers of internal documents undermining an acquirer’s case for clearance. Visa argues that Plaid is not a rival payments company and that its capabilities would complement Visa’s. However, the DOJ cites many instances of internal documentary evidence that it claims supports its view that Visa’s strategy for the deal is to remove a potential competitor. For example, the Visa CEO justifies the deal price tag to the Visa board of directors as a “strategic, not financial” move, and comments that “our US debit business i[s] critical and we must always do what it takes to protect this business”.

Finally, the DOJ’s case took an unusual procedural turn – just a few days before making its complaint, the DOJ filed an action to enforce Visa adviser Bain’s compliance with a civil investigation demand (CID). The DOJ alleged that the consulting firm stymied its investigation by asserting unsupported claims of privilege over important documents relating to Visa’s pricing strategy and competition against other debit card networks. The DOJ has subsequently withdrawn the action, but the proceedings may foreshadow future third party enforcement. Assistant Attorney for the Antitrust Division Makan Delrahim states: “[c]ollecting relevant third-party documents and data is essential to the division’s ability to analyze these transactions. Too often, third parties seek to flout these requirements, hoping the division will lose interest and focus its enforcement efforts elsewhere. The division’s petition against Bain is aimed at securing relevant documents and making clear that the division will hold third parties to the deadlines and specifications in the CIDs we issue.”

Hong Kong sees a series of antitrust enforcement firsts as it launches a “combat price fixing cartels” campaign

Hong Kong’s antitrust law has been in place for nearly five years. In this time the Competition Commission (CC) has brought six cases before the Competition Tribunal, the majority involving price fixing, and this month launched a TV and radio campaign to target price fixing cartels. With the progression of some of these cases, we have recently seen a number of enforcement firsts. Significantly, late last month the tribunal issued its first ever director disqualification order against an individual. This prohibition comes off the back of the CC’s third renovation cartel case where the tribunal found that six companies (including decoration contractor Luen Hop Decoration Engineering) and three individuals allocated customers and fixed prices for the renovation of a public housing estate. Cheung Yun Kam, a Luen Hop director, will be disqualified from serving as a director for a period of one year and ten months in a case the judge considered was medium to low in severity. The tribunal found that although he did not have any direct knowledge or participate in the violation (as he subcontracted the work to another individual), he had reasonable grounds to suspect that Luen Hop’s conduct breached the law as the company was already under investigation for similar contraventions in another case at the time, and he failed to adopt measures to stop or rectify the anti-competitive conduct. The disqualification period, just shy of the two years applied for by the CC, took account of his lack of knowledge of the new antitrust regime, his early confession and the Covid-19-related delay in hearing the case.

Soon after this disqualification order, the CC also broke new ground in an IT sector cartel. For the first time, it reached an agreement with the respondents, Quantr and its director Cheung Man Kit, to resolve both the liability and relief portions of the proceedings before the tribunal by consent. The case also represents the first set of proceedings resulting from a successful leniency application: in a joint application to the tribunal, the respondents admitted their participation in the anti-competitive exchange of future pricing information in a bidding exercise for the procurement of IT services based on Nintex technology. The tribunal ordered Quantr to pay a HKD37,702 (USD4,865) penalty and suspended a director disqualification order on condition that the respondents conduct an antitrust compliance programme for all of its staff. Finally, another participant in the cartel, Nintex Proprietary Limited, accepted the CC’s unprecedented use of an infringement notice as a remedy – the company committed to strengthen its antitrust compliance programme to avoid being named as a respondent in the proceedings. We expect the CC to make greater use of these processes, penalties and remedies as it continues to strengthen its enforcement strategies, with a focus on cartel conduct. This also shows that exchange of commercially sensitive information amongst competitors has been systematically condemned by the CC and involves substantial enforcement risks.

European Commission foreign subsidy proposals receive broad support from EU respondents

The European Commission is taking a hard look at its current toolkit. In recent months it has proposed updates, expansions and even completely new rules in a number of areas. Measures to tackle the possible distortive impact of foreign subsidies are one such area. In June, the Commission published a White Paper on a proposed new regime with three possible strands. First, a ‘catch-all’ instrument for the review of all forms of foreign subsidy that have caused distortions in the internal market, with the possibility to impose “redressive measures” or accept legally binding commitments where necessary. Second, a new mandatory notification system for foreign-backed acquisitions of European businesses, with a two-stage review process, suspension obligation (to prevent closing before approval is obtained) and remedies or even prohibition where an acquisition is found to be facilitated by foreign subsidies which distort the internal market and are not outweighed by any positive “EU interest”. Third, a requirement for foreign companies participating in public procurement procedures in the EU to notify any support from foreign entities. You can read more about the White Paper’s proposals in our alert.

The White Paper was followed by a public consultation and the Commission has now published a summary of the 150 responses received. The summary reveals that the comments were varied and, in a number of areas, conflicting. We have pulled out three key themes:

EU respondents to the consultation (including Member States and other stakeholders) are broadly in favour of the proposals. There are calls, however, for more clarity in some areas – a position we strongly advocated in our response to the consultation. Businesses, for example, are keen to ensure that key concepts such as “foreign subsidies”, “distortion” and “redressive measures” are clearly defined. And there seems to be support by general stakeholders (if not by all Member State respondents) for the Commission to have an exclusive, or at least leading, role in enforcing the rules, to ensure consistent practice.
Unsurprisingly, non-EU respondents (which included some foreign governments) are against the introduction of any new form of regulation on top of existing rules and were critical of the proposals.
The majority of respondents agree on the need for any new rules to be coherent with existing instruments, including the EU merger rules, the new foreign direct investment Regulation (see our alert), public procurement directives and trade defence instruments.

The Commission now faces the task of deciding how to balance the responses, and to what extent to reflect these in the draft legislation. We expect to hear more on the shape of the proposed new rules next year.

Digital/TMT

European Commission steps up Amazon platform probes

The Commission has been formally investigating Amazon’s conduct in online retail markets since July 2019. The regulator has now issued the platform company with a statement of objections, setting out its concern that Amazon systematically relies on non-public business data of rival independent (often SME) retailers who sell their own products on its marketplace, to the benefit of its own retail business. The Commission considers that large quantities of this sensitive, “very granular, real-time” data – including the number of ordered and shipped product units, the sellers’ revenues on Amazon’s marketplace, the number of visits to sellers’ offers and sellers’ past performance – flow directly into the automated systems of Amazon’s retail business where they are aggregated and used to inform strategic business decisions to the detriment of other marketplace sellers. Amazon, it alleges, uses the algorithms to “draw precise, targeted conclusions” as to which new products to launch, individual offer prices and which suppliers to use, for example. The Commission notes that in “many of the most popular product categories, Amazon lists less than 10% of the products available on its platform, but makes 50% or more of all revenues in the category”, marginalising third party sellers and capping their ability to grow. The charge sheet narrows this alleged leveraging of dominance to France and Germany, “the biggest markets for Amazon in the EU”.

The Commission has also opened another formal probe – into the possible preferential treatment of Amazon’s own retail offers and those of marketplace sellers that use Amazon’s logistics and delivery services. In particular, the Commission’s investigation will focus on “whether the criteria that Amazon sets to select the winner of the “Buy Box” and to enable sellers to offer products to Prime users, under Amazon's Prime loyalty programme, lead to preferential treatment of Amazon’s retail business or of the sellers that use Amazon’s logistics and delivery services”. The Commission is also concerned that Amazon may artificially “push” retailers to use its own related services, potentially locking an increasing number of sellers into Amazon’s own ecosystem and preventing them from switching to competing platforms. Competition Commissioner Margrethe Vestager clearly sets out the Commission’s mission: “With e-commerce booming, and Amazon being the leading e-commerce platform, a fair and undistorted access to consumers online is important for all sellers”.

UK Government endorses CMA’s calls for new regulatory regime for online platforms

The UK Competition and Market Authority (CMA)’s market study into online platforms and digital advertising markets found a number of concerns. In particular, it concluded that the strong market positions of Facebook and Google, combined with market characteristics that inhibit entry and expansion, mean that rivals cannot compete on equal terms, leading to weakened competition (see our alert for more details). The UK Government has now published its response to the CMA’s market study report, supporting the CMA’s recommendations for a new regulatory regime. It plans to take forward proposals to introduce a code of conduct to govern the behaviour of digital platforms designated as having “strategic market status”, maintained and enforced by a new Digital Markets Unit (DMU). The DMU will also have the power to make “pro-competitive” interventions (ie impose remedies) to tackle the sources of market power. Our forthcoming alert, telling you what you need to know about the new regime and its likely timing, will be available shortly on www.allenovery.com.

China issues antitrust guidelines on its platform economy

This month the Chinese antitrust regulator, State Administration for Market Regulation (SAMR), published a draft of antitrust guidelines for China’s platform economy. It marks the first time that SAMR has systematically disclosed its approach to antitrust enforcement in the sector and is of relevance to all internet platform operators as well as other companies operating on platforms. The guidelines detail conduct that it considers breaches the antitrust law: monopolistic agreements, abuse of market dominance and administrative power. For example, the guidelines make clear that market definition is not necessarily required for establishing abuse of dominance, and that refusal to deal can be achieved by controlling the “essential facility” in the platform economy (either the platform itself could be regarded as an “essential facility” or the relevant data could constitute an “essential facility”). The guidelines also cover merger filings, notably stating clearly that deals involving variable interest entity (VIE) structures should be reviewed under the merger control regime. These often complex contractual arrangements have been widely used to allow foreign investors to enter restricted sectors in the country and to date have rarely been notified. Our forthcoming alert will provide more detail in the context of a marked broader push towards stronger antitrust enforcement in China.

Life Sciences

European Commission completes cycle of pay-for delay probes with a fine on Teva and Cephalon

Since the Commission’s final report in the pharmaceutical sector inquiry in 2009 it has pursued a number of so-called ‘pay for delay’ settlement agreements between pharma firms. It has found on three occasions that such arrangements delayed generic entry into the market and therefore prevented consumers and health systems from benefitting from significantly lower prices earlier (imposing fines on Lundbeck and others, Johnson & Johnson and Novartis, and Servier and others). A fourth can now be added to the list. The Commission has fined Teva and Cephalon EUR60.5m for agreeing to delay the entry of a cheaper generic version of Cephalon’s sleep disorder drug modafinil. Following in the footsteps of the previous cases, as well as the European Court of Justice (ECJ) ruling in GSK (in response to a referral from the UK on when patent settlement agreements can infringe EU antitrust rules – see our alert), the Commission found that in exchange for entering into a patent settlement agreement, Teva received cash payments and a package of valuable commercial side-deals. As a result, Teva – which was ready to enter the market with its own generic drug and had even started to do so in the UK – stopped its entry. This meant, says the Commission, that Cephalon could continue to charge high prices even though its main modafinil patent had expired. It found that the infringement lasted for six years, from 2005 to 2011, when Teva acquired Cephalon.

The decision is significant on two grounds, both of which were highlighted by Competition Commissioner Vestager in her statement on the case. First, the form of payment from patent holder to generic firm does not matter. In previous cases the value transfer comprised of simple cash payments. Here, Vestager notes, “the mechanism was much more sophisticated, relying on some cash payments and a package of seemingly standard commercial deals”. Second, the Commission is sending out the clear message that “intellectual property rights in pharmaceutical markets are crucial to provide the right incentives to innovate”. The infringement decision completes the final on-going Commission pay-for-delay investigation. But this is not the end of the story. It is open to Teva to appeal - it has said that it plans to. And in the meantime we are waiting for the ECJ’s ruling in the Lundbeck appeal, following the Advocate General opinion earlier this year (see our June edition of Antitrust in focus). However, given that the reviewing judges in the Lundbeck case are the same as those that ruled in the GSK judgment, we do not expect any surprises. The ruling is expected soon.

Transport & Infrastructure

European Commission moves rail predatory pricing case forward with charge sheet

Predatory pricing – where a dominant firm charges such low prices that rivals are forced out of business – is notoriously hard for antitrust authorities to prove, and cases are few and far between. The European Commission’s last case – a July 2019 decision to fine Qualcomm EUR242 million for abusing its dominance in the global market for UMTS baseband chipsets by selling certain quantities of three of its UMTS chipsets below cost to key customers with the intention of eliminating Icera – is being challenged at the General Court. But this fact has not deterred the Commission from progressing its predatory pricing case against the state-owned Czech rail incumbent České dráhy (ČD). Late last month it sent the company a statement of objections setting out its preliminary view that, between 2011 and 2019, ČD abused its dominant position for the provision of rail passenger transport services on the Prague – Ostrava route by offering its services at prices that did not cover its costs. This, alleges the Commission, was in response to two new rail undertakings starting commercial operations on this route. Clearly feeding in to the Commission’s drive in this case is its commitment to deliver on the European Green Deal and its associated prioritisation of rail transport and the improvement of railway networks. Competition Commissioner Margrethe Vestager notes that “[c]ompetition in the rail passenger transport sector can drive prices down and service quality up to the benefit of consumers” and of “the environment too as travellers shift to rail”. As we reported in our October edition of Antitrust in focus, the Commission is currently seeking views on how competition policy can support its green endeavours.

We will closely watch how the case unfolds. Although ČD unsuccessfully appealed the Commission’s 2016 decision to conduct dawn raids in relation to the Prague – Ostrava route from 2011, the General Court annulled the Commission’s inspection decision in so far as it related to other routes, other forms of dominance abuse and the period prior to 2011. In response to the statement of objections, the company notes that it will “cooperate and communicate with the European Commission on particular issues” to minimise any adverse impact on ČD of the “10 years” long investigation.

Other

Italian abuse of dominance case tests competition – sustainability interaction

With the European Commission consulting on how competition rules and sustainability policies work together (see our October Antitrust in focus for more information), it is interesting to follow how the antitrust authorities of EU Member States choose to deal with cases involving this interaction. This month, the Italian antitrust authority has wrapped up an investigation, fining a non-profit national recycling consortium, Corepla, EUR27m for abusing its dominance in the Italian market for services aimed at the recycling and recovery of PET plastic bottles for food use. In particular, the authority found that Corepla prevented a rival consortium of manufacturers of plastic bottles for liquid foods, Coripet, from operating in the sector. Whilst Coripet had been provisionally authorised to launch a project to recycle plastic bottles and to install recycling bins across Italy since 2018, to win a permanent licence from the Italian government it had to prove it could recycle a certain volume of plastic bottles by April 2020. In 2019 it filed a complaint with the antitrust authority that Corepla was obstructing its operations, and the recycling consortium was subsequently raided and subjected to interim measures. Now, the antitrust authority has concluded that Corepla effectively blocked Coripet from entering into recycling agreements with nearly all of Italy’s municipalities. First, Corepla’s plastic waste collection agreement with the National Association of Italian Municipalities (ANCI) – representing 7,041 of 7,914 Italian municipalities – included exclusivity clauses that prevented ANCI from paying another entity to recycle its plastic bottles. Second, Corepla refused to enter into a transitional agreement with Coripet to allow it to collect ANCI’s plastic bottles. The authority’s intentions are clear: to intervene to benefit both consumers and the environment. It notes that Coripet’s project involves an innovative element – the activation of a “bottle to bottle” circuit through the direct bin collection of empty PET bottles from end consumers – and that its actions favour “the competitive dynamics provided for by the Consolidated Environmental Law”.

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