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Antitrust in focus - November 2022

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This newsletter is a summary of the antitrust developments we think are most interesting to your business. Andrew Fincham, counsel based in London, is our editor this month (learn more about Andrew in our Q&A feature at the end of the newsletter). He has selected:

General

Consumer & Retail

Digital & TMT

Labour markets

General

First UK phase 2 fast-track merger case yields significantly shorter review period

Antitrust authorities across the globe are looking for ways to speed up merger review periods and make merger control processes more efficient.

The UK Competition and Markets Authority (CMA) is no exception. In 2021 it introduced a mechanism enabling merging parties to a phase 2 investigation formally to “concede” that their deal raises competition concerns. The parties must also agree to waive their right to challenge this position during the phase 2 review. If accepted by the CMA, the result is that the phase 2 investigation is “fast-tracked” through to the assessment of remedies that could address the authority’s concerns, bypassing various stages required in a “standard” review.

The proposed acquisition by Carpenter of Recticel’s global engineered foams business is the first time this mechanism has been used. At the end of its phase 1 review, the CMA identified concerns in three foam markets in the UK, finding that the transaction could result in a worse deal for UK-based manufacturers that rely on foams to produce their products, as well as leading to less choice and higher prices for consumers. It referred the merger for an in-depth phase 2 investigation in July 2022.

At the beginning of the phase 2 process, the parties conceded that the transaction raised competition concerns in the three foam markets and proposed a remedy to address those concerns. The CMA has now accepted the remedy (with minor modifications) – Carpenter will sell the majority of the UK arm of Recticel’s engineered foams business to an independent third party approved by the CMA.

The CMA’s final decision, issued in mid-November, came more than two months before the January 2023 phase 2 statutory deadline. The review period was therefore reduced by a third. This is a significant timing benefit for the merging parties as well as the CMA. Unsurprisingly, the CMA is keen to emphasise “the potential efficiency benefits of ‘fast track’ remedies processes”.

A more streamlined phase 2 process may appeal to other merging parties as well, even though doing so means giving up the chance for unconditional clearance. In a second phase 2 transaction (Sika/MBCC), the CMA has also accepted a fast track request, with the review currently at the provisional findings stage. We expect to see more of these cases in future.

Allen & Overy acted for Recticel.

UK gets ready for a new subsidy control regime

A new UK-wide subsidy control regime will come into force on 4 January 2023. It will replace the EU state aid system that, post-Brexit, no longer applies in most of the UK. It implements many of the UK’s obligations on subsidy control in the EU-UK Trade and Cooperation Agreement.

We highlighted the differences between the UK regime and EU’s state aid regime, as well as the categories of subsidy given special treatment in the UK, in our May 2022 edition of Antitrust in focus. Most significantly, there will be no UK law requirement for aid measures to be notified and pre-approved. Instead, public authorities will self-assess most subsidies they intend to grant against statutory principles. In some cases, a new division of the Competition and Markets Authority ‒ the Subsidy Advice Unit (SAU) ‒ will provide non-binding advice on compliance with the principles. Aggrieved parties can then, if they act quickly enough, challenge the reasoning behind these decisions (in the Competition Appeal Tribunal, on judicial review grounds) in a bid to get them overturned and require recovery of an unlawfully granted subsidy.

This month has seen more clarity on the workings of the UK framework: statutory guidance; a quick guide to key requirements for public authorities; a principles assessment template; and guidance on the operation of the subsidy control functions of the SAU.

Further gaps remain. The UK Parliament is yet to approve final regulations defining the categories of subsidy subject to special treatment, including potential referral to the SAU. We also expect separate guidance on subsidies in the agricultural and fisheries sectors and for the three streamlined routes currently in development (research, development and innovation, levelling up and clean energy). We will continue to keep you posted on the countdown to implementation and as the regime beds down.

European Parliament adopts Foreign Subsidies Regulation

In Europe, a major development is that the European Parliament adopted the Foreign Subsidies Regulation – a new EU law that attempts to regulate subsidies granted by non-EU countries, so that they do not distort the internal market.

The new rules will impose notification requirements. In particular, companies will have to notify the EC of planned transactions if at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and has an EU turnover of at least EUR500m and the undertakings concerned received a combined foreign ‘financial contribution’ of at least EUR50m in the three calendar years prior to notification.

The EC will also investigate tenders in public procurements if the value of a procurement is at least EUR250m and the operator received “financial contributions” of at least EUR4m per third country in the three preceding calendar years.

The EU Council is expected to adopt the Regulation on 28 November 2022. It will enter into force 20 days after its publication in the EU’s Official Journal and will start to apply six months later. There remains considerable uncertainty about how the Regulation will operate in practice, and how the thresholds for notification will be applied. You can read more about the proposal and its implications in our alert.

State aid in the EU remains in the spotlight: transfer pricing, crisis rules, and de minimis

This month the EU has also seen some important developments in the area of state aid.

ECJ ruling on transfer pricing agreements

First, the European Court of Justice (ECJ) has annulled the European Commission (EC)’s decision ordering Luxembourg to recover unlawful state aid granted to a Luxembourg subsidiary of the Fiat group (FFT). In 2015, the EC had found that the Luxembourg government had unlawfully given the company a “selective advantage” (one of the elements of state aid) by adopting a tax ruling that allowed FFT to pay a lower amount of tax through a transfer pricing agreement. The General Court upheld the EC’s decision.

The ECJ concluded that, since there is no EU harmonisation on a reference system for direct taxation, the EC should have taken the national law applicable in Luxembourg into account. Luxembourg had set down its own interpretation of the arm’s length principle ‒ which is relevant to whether there is a selective advantage ‒ and the EC should not have applied a different one. Our alert provides more details on the ECJ’s judgment and what to expect next.

Temporary Crisis Framework

Second, the EC has amended and extended until 31 December 2023 its Temporary Crisis Framework, which aims to support the economy in the context of Russia's war against Ukraine. The Temporary Crisis Framework was adopted on 23 March 2022 and first amended on 20 July 2022.

The latest amendment increases the ceilings of aid that EU Member States may grant to up to EUR250,000 and EUR300,000 for companies active in the agriculture, and fisheries and aquaculture sectors, respectively, and up to EUR2 million for companies active in all other sectors.

It also introduces additional flexibility for liquidity support to energy utilities for their trading activities, as well as flexibility and support possibilities for companies affected by rising energy costs. Finally, it brings in new measures aimed at supporting electricity demand reduction and clarifies the criteria for the assessment of recapitalisation support measures.

De minimis aid Regulation

Third, the EC launched a consultation on a proposed revision of the de minimis aid Regulation, which is set to expire on 31 December 2023. Under the current rules, Member States can grant support of up to EUR200,000 per beneficiary over a period of three years (the “de minimis threshold”) without prior notification and approval.

The EC wishes to adapt the de minimis threshold to the current economic context, including increasing the de minimis threshold to EUR275,000. Perhaps more significantly, the EC also proposes to increase transparency requirements by introducing a mandatory public register of those who have received any aid below the de minimis thresholds. This may be an unwelcome development for many – at present, EU rules do not require below-threshold aid to be made public. The consultation is open until 10 January 2023.

U.S. FTC to target “unfair methods of competition”

Signalling a significant change of approach, the U.S. Federal Trade Commission (FTC) has approved a new policy statement on the scope of “unfair methods of competition” under section 5 of the Federal Trade Commission Act.

The new policy statement abandons the FTC’s previous, narrow construction of its section 5 authority in favour of an expansive view of behaviours that might be considered unfair methods of competition. In so doing, the FTC opens up the possibility of enforcement in situations previously considered beyond the scope of the FTC’s oversight.

A long list of examples of “unfair” conduct now includes mergers, acquisitions or joint ventures that “have the tendency to ripen into violations of the antitrust laws”, tying, bundling, exclusive dealing or loyalty rebates (and “de facto” versions of these arrangements) that leverage market position or power to entrench that power or impede competition in the same or a related market and practices that facilitate tacit coordination.

The statement also limits the ability of companies to offer procompetitive justifications for the challenged behaviour.

Our alert describes the new statement in more detail, setting out the categories of conduct that might now be problematic, and notes concerns raised in FTC Commissioner Wilson’s dissenting statement. 

Consumer & Retail

U.S. DOJ wins important monopsony merger block

The U.S. Department of Justice (DOJ) has obtained a permanent injunction to block Penguin Random House’s proposed acquisition of Simon & Schuster.

The U.S. District Court found that the merger would substantially lessen competition in the market for the U.S. publishing rights to anticipated top-selling books.

In particular, the judge considered that the merged entity ‒ with 49% of the market and “dwarfing its nearest competitors” ‒ was reasonably likely to decrease the amount of advances paid to authors of these books. The judge pointed to coordinated as well as unilateral effects, finding that the market is already concentrated in a “Big Five” of major publishing houses. She warned that allowing the companies to merge in an industry “already prone to collusion…would reinforce the market's oligopsonistic structure and create a behemoth industry leader that other market participants could easily follow”.

The judge focused on the proposed merger’s effect on authors, who could face lower book advances and less favourable contract terms as a result of the acquisition. The opinion stated that an “overwhelming weight of the evidence supports the conclusion that advance levels are the primary focus of book acquisitions”, as publishers bidding to acquire a book must offer a competitively-priced advance to be considered. The transaction would combine “the top two or the only bidders” for an anticipated top-selling book, causing an “inarguable loss of competition”. 

Notably, the judge also dismissed the parties’ argument that a policy of allowing internal competition between imprints, which are trade or brand names for an editorial group specialising in certain genres of books, would be sufficient to replace the external competition lost from an independent Simon & Schuster. She gave “no weight to this unenforceable promise”, noting that Penguin Random House already coordinates on internal bids despite its current policy to allow imprints to bid against each other where an external bidder remains in the auction.

The win gives the U.S. authorities’ merger enforcement efforts a significant boost after a string of heavy defeats (we commented on these losses in our October 2022 edition of Antitrust in focus). The DOJ will also be encouraged that the win was in a monopsony case. These challenge a merger based on how it will affect the purchase of a good or service ‒ here the buying of publishing rights ‒ rather than, more usually, how it will affect sales to customers.

The case is also an important example of the U.S. agencies’ current focus on protecting competition in labour markets (see also our article on no-poach enforcement below). Commenting on the Court’s findings, Assistant Attorney General of the DOJ Antitrust Division Jonathan Kanter stated that “[t]he decision is also a victory for workers more broadly”. We expect both U.S. antitrust agencies to continue to scrutinise closely transactions that may have possible adverse effects on labour markets, especially considering the U.S. Federal Trade Commission’s announcement in July that it is partnering with the National Labour Relations Board to investigate potential anti-competitive activities in labour.

New Zealand introduces draft legislation to improve supermarket competition

In March 2022, the New Zealand Commerce Commission (NZCC)’s 609-page final report on the country’s grocery sector identified that two supermarkets dominate competition at the wholesale and retail level: Woolworths NZ and Foodstuffs.

It made a number of recommendations, including intervention to improve conditions for entry and expansion, competition for the acquisition of groceries and the ability of consumers to make informed decisions. While these fell short of suggesting structural separation of the supermarket’s retail and whole divisions, the NZCC recommended regulation to improve access to wholesale supply by groceries.

The New Zealand government responded swiftly. In August 2022, it told Woolworths and Foodstuffs voluntarily to provide rivals with fair access to their wholesale products or risk facing government-set prices and terms.

Most recently, this month, the government finalised a Grocery Industry Competition Bill. If enacted, the new law will establish a Grocery Commissioner at the NZCC, with enforcement and monitoring tools. The Minister for Commerce and Consumer Affairs notes that “[i]f the duopoly fails to reach commercial deals, or those deals are not what we would expect in a competitive wholesale market, the Grocery Commissioner will be able to impose additional regulation and require the major retailers to provide wholesale supply on certain terms, including price and range”.

The Bill will also implement other NZCC recommendations. For example, it will enable collective bargaining and implement a Grocery Supply Code to protect suppliers from unfair contract terms. The government wishes to move the legislation forward quickly, aiming for it to be in effect in mid-2023.

Digital & TMT

UK government blocks Newport Wafer Fab semiconductor acquisition on national security grounds

The UK National Security and Investment Act, which entered into force on 4 January 2022 and gives the UK government wide-ranging powers to screen deals for national security concerns, is continuing to have an impact on deal making.

The UK government has now issued its third prohibition under the regime. It requires Chinese-owned technology company Nexperia BV to sell the 86% shareholding it acquired in July 2021 in the UK’s largest semiconductor plant, Newport Wafer Fab (since re-named Nexperia Newport Limited).

The UK government is concerned that the deal will give rise to risks to national security stemming from “technology and know-how that could result from a potential reintroduction of compound semiconductors at the Newport site”. It also identified a concern that “the location of the site could facilitate access to technological expertise and know-how in the South Wales Cluster…and the links between the site and the Cluster may prevent the Cluster being engaged in future projects relevant to national security”.

Significantly, it is the first time that the UK government has blocked a transaction using its powers to review retrospectively deals that completed before the rules took effect.

Nexperia has announced it will appeal, stating that the decision is “wholly incorrect” and sends a signal that the UK is closed for business.

More generally, the decision demonstrates that semiconductor acquisitions continue to face close government scrutiny. The German government has also been active in this sector, blocking Chinese investments in two domestic semiconductor companies earlier this month.

Our alert tells you more about the Newport Wafer Fab prohibition and its implications.

French Competition Authority fines Essilor for abuse of a dominant position by restricting online sales

The French Competition Authority (FCA) has imposed a EUR 81 million fine on Essilor International and its parent EssilorLuxottica for abuse of a dominant position on the wholesale market for distribution of corrective lenses in France.

In France, Essilor is a manufacturer and wholesale distributor of optical lenses. Given its large and stable market share, the density and reliability of its distribution network and its presence at all levels of the industry's value chain, the FCA concluded that Essilor was dominant in the French market.

The FCA found that Essilor abused that dominant position by implementing a discriminatory commercial policy aimed at restricting online sales in France. For almost 12 years, Essilor prevented certain online retailers from offering Essilor products either in a hybrid form or fully online. In particular, it refused to deliver branded lenses to online retailers and prohibited them from using Essilor's trademarks and logos, and from communicating the lenses’ origin. It also imposed warranty limitations on them.

Essilor argued that the restrictions were justified by the differences in reliability of measurements taken by opticians in person as opposed to those determined online. However, the FCA said that Essilor did not provide evidence to support these claims.

In calculating the fine, the FCA notes it took into account the fact that the practices lasted for a very long period and that Essilor is part of a global group that is the leader in its field. Essilor plans to challenge the FCA’s decision.

It will be interesting to see if the enforcement of any similar future cases will develop as a result of the new EU rules on vertical agreements (which cover agreements between companies operating at different levels of the supply chain). They explicitly provide that restrictions in agreements having as their object the prevention of buyers or their customers from effectively using the internet to sell their products are “hardcore”. This means that they cannot benefit from the safe harbour granted by the Vertical Block Exemption Regulation, which exempts certain vertical agreements from the prohibition on anti-competitive agreements. You can read more about the new rules in our alert.

Read our insights on the appeals of the EU CK Hutchison/Telefónica UK prohibition and French fine on Apple

Our October 2022 edition of Antitrust in focus reported on two key developments on which we promised alerts giving you more detailed commentary:

  • The Advocate General’s opinion on the European Commission (EC)’s prohibition of CK Hutchison’s proposed acquisition of Telefónica UK. Our alert considers the background to the opinion and explains why, if followed by the European Court of Justice, the EC’s bar to block mergers may be lowered.
  • A Paris Court of Appeal ruling partially overturning the French Competition Authority (FCA)’s record fine on Apple and two of its authorised wholesalers. Our alert takes you through the court’s judgment and reasoning, as well as what it means for FCA enforcement going forward.

ACCC recommends introduction of digital platform competition and consumer regulation in Australia

This month the Australian Competition and Consumer Commission (ACCC) published its fifth Digital Platforms Services Inquiry Interim Report (Report), recommending specific digital platform competition and consumer regulation in Australia.

The Report forms part of the ACCC’s five-year Digital Platforms Services Inquiry, which requires the ACCC to conduct bi-annual market inquiries, and publish reports on topics related to digital platform services. The ACCC has previously released reports on competition and consumer concerns in online private messaging services, app marketplaces, web browsers and general search services, online marketplaces, and advertising technology.

Relying on findings from these previous inquiries, the Report identified “significant” competition and consumer harms across a range of services. In many instances, these concerns were underpinned by the market power of large digital platforms and their potential to engage in anti-competitive conduct.

The ACCC also concluded that existing competition and consumer laws in Australia are insufficient to address these harms and potential harms quickly or effectively. The ACCC cited growing international consensus that digital platforms require specific and tailored regulation.

The ACCC therefore recommended that the Australian government introduce:

  • New consumer law legislation, including targeted laws for digital platforms (of all sizes). This regulation would target scams, and the removal of harmful apps and fake reviews, including requirements for digital platforms to implement mandatory processes for complaint handling.
  • Ex ante competition regulation via service-specific codes of conduct that would apply to certain ‘designated’ digital platforms (those assessed as having the ability and incentive to harm competition).

Similar to the regime proposed in the UK (which is now expected to be in force from October 2023), these codes are to be based on legislated principles and would impose a range of obligations to target, for example, anti-competitive self-preferencing and tying behaviour, exclusive pre-installation and default arrangements, barriers to switching and interoperability, data advantages and transparency issues.

The Report envisages initially codes for: search services, advertising technology, mobile app stores, and mobile operating systems. Future codes might cover other services, including browsers and social media.

The Report acknowledges that digital platforms’ behaviour is difficult to assess, and that the codes should not contain outright prohibitions on conduct that may be pro-competitive, as this would risk unintended consequences. The ACCC proposes that obligations should be reasonable and appropriate and that the codes should allow for exemptions on a case-by-case basis, such as for necessary and proportionate privacy and security justifications.

Finally, the ACCC calls for regulators to be given sufficient powers to properly administer the new regulation and the ability to impose substantial penalties for breach.

There is still a long way to go before any new rules are in place: the government is expected to conduct further public consultation before determining whether to endorse the ACCC’s recommendations, which will also require the introduction of new legislation. .

Meanwhile, the new legislation that significantly increases penalties for antitrust infringements has been enacted, and came into force on 10 November 2022. We reported on the proposals in our October 2022 edition of Antitrust in focus. The upshot: companies that breach Australian antitrust laws may now face far more severe sanctions.

Labour markets

U.S. DOJ secures first no-poach / wage-fixing criminal enforcement win

Late last month, a health care staffing company ‒ VDA (previously known as Advantage On Call) ‒ pleaded guilty to entering into and engaging in a conspiracy with a competitor to allocate employee nurses and to fix the wages of those nurses. The conspiracy targeted nurses serving a Nevada school district and reportedly involved very limited contact between the conspirators.

VDA has been sentenced to pay a criminal fine of USD62,000 and restitution of USD72,000 to compensate nurses harmed by the agreement. The maximum fine for criminal wage-fixing and no-poach agreements is USD100 million for companies and USD1 million for individuals. Despite the relatively low level of the fine in a broader sense, the amount is significant when considering VDA’s size and its cooperation. The DOJ’s calculation of the fine was based on wages paid to the affected employees during the time period of the conduct, which was less than a year, suggesting that larger companies engaged in long-ranging conduct could be exposed to larger penalties.

Our May 2022 edition of Antitrust in focus covered the setbacks the U.S. Department of Justice (DOJ) has faced this year in its campaign against anti-competitive conduct in labour markets. Unsurprisingly, therefore, the DOJ has welcomed the outcome of this trial. It marks the DOJ’s first successful criminal prosecution of such behaviour.

Assistant Attorney General of the DOJ Antitrust Division Jonathan Kanter has warned that the “guilty plea demonstrates our commitment to ensuring that workers receive competitive wages and a fair chance to pursue better work and that criminals who conspire to deprive them of those rights are held accountable”.

The increased focus on labour markets has led to fines on both sides of the Atlantic.

Last month the Polish Competition Authority (PCA) issued its first decision concerning a no-poach infringement and fined the Polish Basketball League and 16 Polish basketball clubs nearly EUR200,000. The PCA found that after the 2019/2020 season (terminated early due to the Covid-19 pandemic) several clubs, with support from the league, agreed not to pay their players’ wages for the remainder of the season and to terminate their contracts. This is not the only antitrust investigation concerning labour markets in Poland. There are also ongoing proceedings against the Polish motorsports federation and the Speedway Extraleague for imposing maximum remuneration rates for professional motorcyclists.

A&O Antitrust team in publication

Recent publications/initiatives by members of our global team include:

  • Richard Macko (Associate, Bratislava): Náklady a financovanie sporov z porušenia súťažného práva (Costs and Financing of Private Antitrust Disputes), Antitrust, July 2022
  • Richard Macko (Associate, Bratislava): Stand-alone žaloby na Slovensku v ohrození. Doktrinálny disent k rozsudku Najvyššieho súdu SR z 24. 6. 2020, sp. zn. 3 Obdo 108/2019 (A Doctrinal Dissent to the Judgment of the Slovak Supreme Court of 24 June 2020, Case No. 3 Obdo 108/2019), Antitrust, November 2022

About your editor

Andrew is a counsel in our global antitrust team, based in London. He has a particular specialty and interest in issues at the intersection of antitrust law, industry regulation and microeconomics: mergers, behavioural antitrust, economic regulation, market studies and remedies implementation, subsidy control/state aid and public procurement.

Andrew’s work typically involves a regulatory backdrop, and he provides legal advice in areas that require understanding of complex microeconomic or quantitative issues. His work often involves antitrust and regulatory issues in energy supply and networks, or in financial services.

Andrew is qualified in England and Wales and New Zealand. He has a Master of Laws degree from the University of Chicago and degrees in law and economics from the University of Auckland.

Spotlight on Andrew:

A typical working day in London involves… On non-school run days, I’m up around 6.30, quick breakfast, train then bike/run to the office, get dressed and, more importantly, get coffee, at my desk around 9. On school run days, I’m at my desk at home from around 9, incorporating school drop off/pick up and cooking dinner into my routine. The work itself is very varied – I can be doing completely different things from week to week.

If I hadn’t become an antitrust lawyer, I would most probably be … That’s difficult! It probably depends when my path would have diverged – I studied a lot of maths and economics at university (along with law) so probably would have gone into economics or computers and technology.

The best career advice I’ve been given is… don’t sweat the petty things. That is, to try to stay out of the fray – not get consumed by office politics, or rankings, or gossip. A career is a long time, and the world is unpredictable – nothing lasts. But in the long term focusing on doing the fundamentals right and being seen as a positive influence and reliable pair of hands has worked out reasonably well for me, and has saved a lot of anxiety along the way!

The most interesting matter I’ve worked on is… There are so many! Things get most interesting for me when it gets into business strategy, and even more when there’s a wider policy dimension, going beyond the standard competition law tests. For me that comes up most often in market studies (or similar) and in regulated industries work, where regulators can decide whether to make or apply a rule. The FCA and CMA interventions in investment banking and retail banking were really interesting to work on for that reason.

For me, being a good lawyer/advisor means… having empathy. It’s not always possible, but I think I give the best advice when I am able to put myself in my client’s shoes: what constraints is she under? what else is on her mind beyond the narrow question I’m being asked? how is the answer I give going to cause these other issues to play out? If I can anticipate these issues, then I can give much more rounded and complete advice.

Something I’d like to do but haven’t yet done is… Really get to know more of the great cities of the world. I know London and Chicago pretty well, but I’ve barely spent more than a week in LA, New York, Paris, Berlin, Hong Kong, Singapore; and I’ve never been to Tokyo, Shanghai, Bangkok or Mexico City. Three months in each should do, at least for a start…

My ideal weekend in two sentences… An adventure! Up before dawn, early train or flight to somewhere I haven’t been, then a day spent hiking or cycling (if in the countryside), or exploring a new city. Ideally, I’d then stay over for few nights (the ideal weekend is a long weekend!).

My typical weekend in two sentences… Woken at 6, 7 and 8 am by daughter, a rushed breakfast, get daughter ready for ballet lessons. Once back home, 3 or 4 hours to do shopping or work in the garden, take daughter to swimming lessons, get dinner ready, get daughter to bed, rinse and repeat…

Something that might surprise you about me is… my daughter thinks I am the silliest person she knows.

My top tip for visitors to London is… walk or bike wherever feasible. All of the interesting sights, and far fewer of the crowds, are above ground rather than underground, and distances are pretty short – from A&O’s offices in Spitalfields, right across town to Hyde Park, is less than 6km. And it’s usually not that wet (this month excepted!).