Trustbusting in the EU
Sep 09, 2010 QuickCounsel Download PDF
By Anthony Rosen
The European Commission (Commission) continues to keep a close eye on the behaviour of companies and remains determined to unearth and punish cartelists. Recently, the Commission has fined participants in the animal phosphates, pressing steel and bathroom equipment manufacturing cartels a total of €1.2 billion. The Commission also continues to tackle abuses of dominance and has just opened investigations into IBM and in the last year settled proceedings with Rambus for patent ambushing, not to mention its continued focus on Microsoft.
Companies must ensure that they have robust procedures in place to safeguard against possible breaches of competition law. Not only are the sanctions severe (in terms of fines and possible imprisonment in certain jurisdictions, e.g. US and UK), but the possibility of follow-on damages claims and the reputational damage to companies further increases the importance of good compliance.
The Competition Rules
EC competition law prohibits: (i) anti-competitive agreements; and (ii) the abuse of a dominant position by one or more companies. The key provisions are:
To infringe Article 101(1) there must be an agreement (anticompetitive) between two independent businesses. The agreement can take many forms, need not be in writing or legally binding, and even tacit acceptance may be sufficient.
The agreement must then have an impact on inter-state trade in one or more EU Member States. If the effects of an agreement are limited to a single member state domestic competition laws may be applicable instead. Actions by companies located outside of the EU will also be caught if they impact trade within the EU.
The agreement must then be restrictive of competition. In some instances this is clear cut and in other cases it is necessary to look in more detail at the purpose behind the agreement. Price fixing, market allocation, limiting production and bid rigging are typical examples of conduct that will amount to per se restrictions of competition.
Other types of agreement will likely require a more detailed assessment of the competitive impact in the relevant product and geographic markets affected in order to consider whether they will fall foul of the competition rules. Typically, vertical agreements entered into between companies at different levels of the supply chain (e.g. distribution or supply agreements) are unlikely to raise competition concerns, and horizontal cooperation agreements between companies operating at the same level in the supply chain may also be permitted in certain circumstances.
To provide assistance to parties, the Commission has adopted a series of block exemptions and guidance to cover various types of agreements:
Vertical Agreements Block Exemption - provided such agreements do not contain any price fixing conditions and export bans (restrictions on passive (unsolicited) sales) – so-called “hard-core” restrictions – and the market shares of both the supplier and buyer are below 30%, such agreements will generally benefit from an exemption to the competition rules.
Horizontal co-operation agreements - the Commission has issued and is now consulting on revised guidance on horizontal co-operation agreements, which in many instances can be beneficial to consumers and competition, and so may benefit from an exemption. The Commission’s guidance covers a wide variety of agreements, including: research and development, standard setting/standardisation, specialisation, information exchange, joint production, commercialisation (selling, distribution or promotion of products) and joint purchasing. There are also two further block exemptions governing research and development and specialisation agreements. These documents are due to expire at the end of this year but will likely be renewed.
Technology Transfer Block Exemption - The Commission has also issued guidance and a block exemption that governs licensing agreements for the transfer of technology. This covers patents and know-how agreements. Trademark and copyright agreements are not covered by the block exemption.
Clearly, this series of block exemptions and guidance will not cover every agreement. In these circumstances, the agreement may still benefit from an exemption to the competition rules, provided the criteria set out in Article 101(3) are satisfied. The agreement must: (i) bring efficiency benefits by improving production or distribution or promoting technical or economic progress; (ii) allow consumers a fair share of the resulting benefits; (iii) only impose restrictions which are indispensable to the achievement of those objectives; and (iv) not allow the parties the possibility of eliminating competition in respect of a substantial part of the products in question. This essentially requires the parties to balance the pro-competitive benefits of the agreements against any anti-competitive effects. The Commission has issued guidance on the application of Article 101(3).
It is worth noting that the Commission is only concerned with agreements that have an appreciable effect on competition, and to this end, agreements which are “de minimis” (of minor importance) will not be prohibited unless they contain “hard-core” restrictions of competition (such as price fixing or market sharing).
Abuse of a Dominant Position
Article 102 TFEU prohibits the conduct of one or more undertakings which amounts to the abuse of a dominant position within the EU if it affects trade between EU Member States. To assist companies the Commission has published guidance on its enforcement priorities in relation to Article 102 and this provides an overview of relevant caselaw and previous Commission enforcement action.
A dominant position is a position of economic strength which enables a firm to hinder effective competition on a market by allowing it to behave to an appreciable extent independently of its competitors and customers, and ultimately of consumers. Establishing dominance requires a detailed analysis of the product and geographic markets within which the company or companies operate. The market shares (market shares below 40% are unlikely to be sufficient to establish dominance) and market dynamics (barriers to entry, buyer power, number of other players in the marker, recent entry and exit and other factors) will then be considered in order to establish dominance.
It is also possible for two or more firms to be found to be collectively or jointly dominant. This can arise where there are strong links between the undertakings or due to the structure of the market. In oligopolistic markets joint dominance can be established where strict conditions relating to transparency, product homogeneity and the ability to retaliate are satisfied. However, in practice this more commonly arises in the context of substantive merger assessment (examination of coordinated effects) rather than in abuse cases.
It must be emphasised that the holding of a dominant position is not unlawful – it is the abuse of a dominant position that is prohibited. Article 102 TFEU contains a non-exhaustive list of abusive practices and common abuses include: excessive pricing, predatory pricing, discriminatory pricing and other discriminatory conduct (which is not objectively justified), loyalty rebates, refusal to supply and tying. More recently, the Commission has classified other conduct as abusive such as patent ambushing. It is clear that the Commission will not tolerate abusive conduct and dominant companies should take special care to ensure their conduct does not restrict competition.
It should be noted that there is no possibility of an exemption from Article 102.
Powers of Investigation
The Commission has strong powers of investigation and enforcement. The Commission has powers to require companies to provide information on agreements or practices and can also carry out on-the-spot investigations (or “Dawn Raids”) of company premises or even private homes where it suspects an infringement. It recently carried out inspections for suspected cartel activity in the polyurethane foam sector. It is therefore essential to be prepared for any such investigations and maintain appropriate Dawn Raid guidance in addition to any competition compliance procedures/manuals.
It is common for investigations to continue for a number of years. In an attempt to shorten this process, the Commission has started to engage in settlement proceedings and also accept commitments from parties to bring investigations and suspected infringing conduct to an end (for example, see Rambus and British Airways commitment decisions).
Consequences of Infringement
Any agreements or conduct found to infringe the competition rules will generally be unenforceable. In terms of sanction, the Commission can and will impose fines of up to 10% of worldwide turnover and order the investigated parties to bring the infringing conduct to an end. Liability will not end with the Commission’s enforcement action; parties will then likely face follow-on actions in national courts for damages, and the Commission is encouraging such action. Of course, this is aside from any reputational harm and loss of management time caused by the investigation and the infringement decision.
In order to increase the likelihood of discovering cartels, and given the consequences of breaching the competition rules, the Commission has developed a leniency programme to encourage “whistle blowing”. Companies that blow the whistle and come forward first with evidence of a cartel may qualify for 100% immunity from fines and other companies may also benefit from a reduction in the level of fines for cooperation. The Commission has issued a leniency notice and guidelines on the level of financial penalties.
Competition enforcement continues to remain a top priority for the Commission. It is essential for companies to be prepared and conduct risk assessments of any agreements and conduct in order to identity any potential risks. Dominant companies must be vigilant and have a special responsibility to ensure their conduct is not abusive. Overall, good compliance is key. If in doubt don’t be afraid to seek appropriate advice. It is better to identify problems now before the inspector calls.
Additional ACC Resources
ACC Resource Library - Primer
ACC Resource Library - Primer
ACC Resource Library - Article
ACC Resource Library - Primer
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