European Commission seeks to impose interim measures for first time in nearly two decades
In recent months there have been calls from commentators, expert reports and antitrust officials for antitrust authorities to make greater use of so-called ‘interim measures’, which require companies suspected of engaging in anti-competitive behaviour to stop their conduct pending a final decision in an investigation. The European Commission (Commission) has rarely used its interim measures powers in practice – the last time it did so was 18 years ago, against IMS Health. But now, in a landmark move, it has sent a Statement of Objections to Broadcom, notifying the firm of its intention to impose an interim measures order (read our full summary). The Commission’s preliminary conclusions are that Broadcom is likely to hold a dominant position in various markets for the supply of components for TV set-top boxes and modems, and that Broadcom may have abused that dominant position by entering into agreements with customers that require them to purchase exclusively (or almost exclusively) from Broadcom. This, says the Commission, may result in the elimination or marginalisation of Broadcom’s rivals from the market before the end of the Commission’s full investigation into various exclusionary practices. It concludes that there is therefore a risk of serious and irreparable harm to competition, and that Broadcom should be prevented from enforcing these provisions. Broadcom is not required to halt any behaviour just yet – it will now have the opportunity to respond to the Commission’s charges. In the meantime, the Commission will push on with its full investigation, which it opened on a formal basis at the same time as issuing the Statement of Objections.
The case signals that the Commission is willing to make use of interim measures, particularly in technology/digital markets where the calls for greater and earlier intervention have been strongest. In the UK, for example, the Furman report on digital markets (see our summary) recommended a streamlining of the UK Competition and Markets Authority (CMA)’s processes to facilitate greater and quicker use of interim measures. The CMA Chairman’s letter to the UK Government proposing changes to the UK’s antitrust regime (see our summary) was also clear that greater use of interim measures is “essential” in order to respond to the challenges of the digital sector. It seems that the Commission may have taken notice of these calls. But Broadcom is only one case – we will need to see more interim measures being imposed to be able to conclude that the Commission has fully changed its practice in this area.
Chinese fine adds to global RPM enforcement record
The enforcement of resale price maintenance (RPM) agreements is never out of the antitrust headlines. Cases over the last year include the European Commission’s decision to fine electronics manufacturers for fixing online resale prices, the Korea Fair Trade Commission’s decision to penalise two tire manufacturers for imposing sanctions on retailers who failed to comply with minimum resale price requests and the Turkish antitrust authority’s decision to fine Turkcell for RPM with regard to its top-up credits. The Chinese antitrust authorities have been particularly active in this area. Most recently, the State Administration for Market Regulation (SAMR) fined Ford’s joint venture with Changan Automobile Group CNY162.8m (approx. EUR20.9m / USD23.56m) for forcing dealers in Chongqing to sell its passenger cars above a certain price since 2013. The SAMR considered that Changan Ford had failed to provide evidence that its conduct could fall within an exemption, for example by improving technology, and instead concluded that the manufacturer’s conduct “deprived the downstream dealers of pricing autonomy”, excluded and restricted intra-brand competition, decreased inter-brand competition and harmed consumers. There are two points to note. First, in past cases the Chinese courts and antitrust authorities seem to have adopted diverging approaches to the question of whether RPM-related cases should be assessed using a ‘rule of reason’ analysis or treated as illegal per se. In practice, the SAMR seemingly continues to treat RPM as illegal per se. Second, the case may mark a shift in the SAMR’s fine calculation method; the level of Changan Ford’s penalty amounts to 4% of Changan Ford’s overall Chongqing sales in the preceding year, not only sales of those vehicles subject to the RPM.
It is anticipated that over time, clarity on whether RPM requires ‘by object’ or ‘by effect’ analysis will be provided. In the meantime the SAMR is expected to continue to take a tough line to deter RPM as well as misconduct more generally in the auto sector and we expect RPM to remain vigorously policed in China. Back in Europe, some stakeholders question whether a blanket ban on RPM is still justified. The European Commission is set to review its approach this year as part of a revision of its rules on how competition law applies to vertical agreements.
Consumer & Retail
Win for Booking.com as German court finds certain pricing clauses are not anticompetitive
Pricing agreements between hotels and booking portals have faced intense antitrust scrutiny in recent years. In 2015 the Federal Cartel Office (FCO) found that pricing arrangements between hotels and Booking.com were anti-competitive. The clauses in question were so-called ‘best-price’ or ‘most favoured nation’ (MFN) provisions, which prohibited hotel operators from offering lower prices on their own sites or on rival portals, essentially guaranteeing that Booking.com would always be able to offer the best rates. Booking.com offered to modify the clauses so that hotels could offer rooms cheaper on other booking portals, although the hotels would remain restricted from displaying lower prices than Booking.com on their own websites. A number of other antitrust authorities around the EU (including France, Italy and Sweden), who were also investigating the arrangements, accepted this “narrow” version of the MFN clauses, and closed their probes. But the FCO took a more hard line approach. It found that all the MFN provisions were problematic from an antitrust perspective, concluding that they infringed the hotels’ freedom to set prices and made entry of new platforms difficult. Booking.com appealed, and has now won its case at the higher regional court in Düsseldorf. The court found the narrow MFN provisions were not anti-competitive – it concluded they are necessary, to ensure a fair and balanced exchange of services between portals and hotels.
The ruling brings the German position in line with the approach broadly accepted by other antitrust authorities across the EU. The FCO stated in a tweet that it will wait to see the court’s full ruling before deciding whether to appeal. In the meantime, Danish booking platform Nustay has filed a complaint with the European Commission against Booking.com and Expedia over alleged illegal pricing clauses and abuse of dominance – it remains to be seen whether the Commission will take any action. More generally, the German investigation shows the potential for differing interpretations and applications of antitrust rules by EU national antitrust authorities. This could well be an area that the Commission attempts to address as part of the forthcoming revisions to its guidance on vertical agreements.
Mexico opposes Walmart’s acquisition of online groceries delivery start-up
The outcome of the substantive analysis of retail mergers tends to be very jurisdiction-specific. A fact highlighted this month with the Board of Commissioners of Mexico’s competition authority (COFECE) deciding to block retailer Walmart’s proposed acquisition of on-demand grocery delivery company Cornershop. Chile’s competition authority, FNE, had unconditionally cleared the deal in January. FNE found that the acquisition would not substantially harm competition in Chile given the dynamism and current volume of the country’s online delivery services industry, and the fact that Cornershop services are mainly provided to Walmart. In comparison, COFECE had three vertical concerns: (i) Cornershop could refuse to offer its services to Walmart competitors; (ii) Walmart could refuse to retail its products on platforms operated by Cornershop’s competitors; and (iii) the merged entity could induce Walmart’s rivals to abandon the Cornershop platform through the strategic use of information produced and provided by competitors to retail their products. The commitments offered by the parties failed to resolve these concerns. Press reports are that Walmart has abandoned the acquisition as a result of the COFECE decision.
The case will be of interest to the retail sector globally – players are likely less familiar with how competition authorities deal with vertical tie-ups, especially involving digital markets, than with assessing and remedying horizontal overlaps.
UK report on digital mergers recommends a change of approach
The question of whether competition policy and rules should be amended to better address the digital age continues to challenge governments and regulators. In recent months, a string of reports have been published which aim to contribute to the debate, including the Furman report in the UK (see our summary), an EU expert panel report (see the April edition of Antitrust in focus for a summary) and a study by the University of Chicago’s Stigler Center. Latest in line is an independent report commissioned by the Competition and Markets Authority (CMA) from economic consultancy Lear. The report evaluates several past UK digital merger decisions by the CMA’s predecessor, the Office of Fair Trading (OFT), including Facebook/Instagram and Google/Waze. While not calling into question the OFT’s ultimate conclusions, the report does find “gaps” in its analysis, in particular a focus on the users’ side of the markets in question, rather than considering substitutability for advertisers. The report makes a number of recommendations for changes in the CMA’s approach to assessing digital mergers:
• Ensuring it considers current business models and monetisation strategies of the parties
• Improving the information available to the CMA when defining the ‘counterfactual’ (i.e. the expected situation in the absence of the merger), e.g. by using dawn raids to gather internal documents, using transaction value as a screen to identify where a more detailed analysis is required, and better understanding the market for online advertising
• Using a timeframe of longer than two years when assessing, for example, market entry
• Being more willing to accept uncertainty in the counterfactual
In a speech announcing and commenting on the report, the CMA’s Chief Executive Andrea Coscelli broadly supports the recommendations, emphasising that “evolution not revolution” of UK merger tools is needed to deal with mergers in the digital economy. He notes that the CMA is already starting to make changes in practice, pointing to the recent PayPal/iZettle phase 2 clearance, where it considered a ‘dynamic’ counterfactual. On the more radical suggestion of using dawn raids in merger cases, however, he makes the welcome comment that there are “questions around whether dawn raids of this type should ever be necessary”. In parallel the CMA has also published a call for views on digital mergers, with a view to updating its 2010 merger assessment guidance. Antitrust authorities around the world will no doubt review the report and results of the consultation with interest. We expect they will also follow closely any steps to implement one of the Furman report’s recommendations: a new digital markets unit – Theresa May has announced that Professor Furman will advise the Government on this project. For more information on the Lear report read our full summary.
UK energy regulator fines suppliers and facilitator for market sharing
Antitrust infringement decisions in the UK energy sector are uncommon. So the energy regulator (Ofgem)’s decision to fine two suppliers and an energy software and consultancy service a total of GBP870,000 for market sharing and customer allocation in relation to the supply of gas and electricity to domestic customers is notable. The case stands out as Ofgem fined the software and consultancy service, Dyball Associates, GBP20,000 for acting as a facilitator. The two suppliers, E Gas and Electricity and Economy Energy, agreed not to actively target each other’s customers through face-to-face sales and shared commercially sensitive and strategic information detailing their current customers. Dyball enabled that arrangement by designing, implementing and maintaining software systems that allowed customer meter point details to be shared and recruitment of each other’s customers to be blocked, and by itself sharing customer lists and instructions to block customer switching. In targeting the service provider, Ofgem notes that Dyball was aware of the suppliers’ conduct and anti-competitive intent.
For the UK energy sector, there is perhaps a hint that more cases are to come: Ofgem notes that its action “sends a strong signal to suppliers that [it] will take action and penalise those who undermine competition and do not act fairly”. More widely, the decision acts as another reminder of the risks of facilitating a cartel, even if the facilitator is not itself active in the cartelised markets. Outside the UK, action has been taken against facilitators by the European Commission (against, e.g., ICAP in relation to the Yen interest rate derivatives cartel, currently under appeal) and national antitrust authorities (see the April edition of Antitrust in focus for a Spanish case in the tobacco sector). A final point: competition stakeholders globally will read with interest how Ofgem dealt with any use of algorithms; it says it will publish the full text of the decision in due course.
Petrobras settles Brazilian oil-refining probe with divestments
The Brazilian competition authority (CADE) has entered a landmark agreement with Petrobras to settle an abuse of dominance probe in the oil refining sector. CADE opened a preliminary investigation into the State-controlled oil company in December 2018, following an economic study by the authority which found that Petrobras holds 98 per cent of the market. Under the terms of the settlement, Petrobras has agreed to sell eight of its 13 refineries. Buyers must be independent of Petrobras, and certain assets cannot be sold to the same buyers. Petrobras must now start the sales process: it has until the end of 2021 to complete the divestments – if it fails to comply with the terms of the settlement, the CADE will likely resume the investigation.
CADE’s Superintendent has described the settlement as historic, with the divestments to result in the opening of the Brazilian oil refining market to competition. The case fits with a wider strategy of Brazilian regulators to improve competition in fuel markets (including a working group set up in summer 2018 between CADE and Brazil’s oil and gas regulator ANP to look at the structure of the sector). Interestingly, though, not all CADE Tribunal members were behind the settlement agreement: two rejected the proposal, reportedly arguing that Petrobras’ decision to sell the refineries was a unilateral decision by the company, and was unrelated to the investigation. And it appears that the Senate’s Economic Affairs Committee is now also getting involved: it has invited members of CADE as well as various other stakeholders, including a representative from Petrobras, to participate in public hearings to discuss the approval of the agreement and the dissenting opinions.
Industrial & Manufacturing
European Commission blocks Tata-ThyssenKrupp steel joint venture
Merger prohibitions are rare. The European Commission has only blocked ten mergers in the last ten years whilst approving over 3,000. But Tata-ThyssenKrupp is the third deal it has vetoed this year (after Siemens/Alstom and Wieland/Aurubis). The announcement was expected; the steel producers had waived the white flag in May on the basis that giving further concessions would undermine the economic logic of their proposed joint venture. The Commission’s concerns centred on two sectors: the steel packaging industry and the automotive industry. It considered that the merger would have reduced choice in suppliers and led to higher prices for European customers of metallic coated and laminated steel products for packaging and automotive hot dip galvanised steel products. The Commission notes that these particular steel products are very specific, complex to produce and of high value with few suppliers beyond the merging parties able to offer significant volumes to customers. And the customers – ranging from major corporations to numerous SMEs – claimed they would not be able to turn instead to third country suppliers; imports would fail product and service quality and delivery requirements and carry security of supply issues. The parties offered divestments, but the Commission considered the asset packages too limited in product and geographic scale and scope. In relation to tin plate, for example, the proposal included no assets for the production of the necessary steel inputs and covered only a small part of the overlap between the parties.
The prohibition lands as stakeholders debate whether the EU merger control rules should be adapted to facilitate the creation of ‘European Champions’ better able to survive in the global marketplace. In this context, Commissioner Vestager has argued that blocking Tata-ThyssenKrupp would protect the European packaging and automotive industry, and ultimately consumers of canned food and cars, from a huge steel manufacturer that could reduce supply and innovation and raise prices. It is clear that promoters of a new veto power – allowing EU governments to override Commission decisions – have work to do if they are to convince all industry players, governments and regulators of the merits and efficacy of a new system.
U.S. DOJ allows pharma company to avoid guilty plea with deferred prosecution agreement
In step with other antitrust authorities across the globe, the U.S. Department of Justice-Antitrust Division (DOJ Antitrust) has been investigating anti-competitive conduct in the generic pharmaceutical industry for a number of years. This month it brought its third charge in a probe into a price fixing, bid rigging and customer allocation conspiracy in relation to glyburide, a medicine used to treat diabetes. Having previously charged Heritage Pharmaceutical’s former CEO and former president, DOJ Antitrust has now charged the company itself. Under the terms of a deferred prosecution agreement (DPA), Heritage has admitted its guilt, will pay a USD225,000 criminal penalty and will cooperate fully with DOJ Antitrust’s on-going criminal investigation into the company’s competitors. In a separate civil resolution, Heritage has agreed to pay USD7.1m to resolve False Claims Act allegations in relation to glyburide and two other drugs.
This marks DOJ Antitrust’s first use of a DPA with a company other than a bank. A DPA involves the filing of criminal charges but deferring prosecution in exchange for a negotiated agreement to comply with conditions, in this case for three years, after which time the charges against the company will be dismissed. As long as their conditions are fulfilled, DPAs do not lead to criminal conviction and the collateral consequences that follow from other regulatory agencies. Banks, for example, are automatically disqualified from providing certain services regulated by the U.S. Securities and Exchange Commission and the U.S. Department of Labor when they are convicted, absent receipt of discretionary waivers from those authorities. Essentially, conviction can automatically disqualify a bank from conducting substantial portions of its business. To avoid this draconian outcome, and the resulting risk to the stability of the financial market, DOJ Antitrust has occasionally agreed to DPAs with certain banks.
DOJ Antitrust has not previously permitted corporates like Heritage to resolve criminal conduct with DPAs. And DOJ Antitrust typically has taken the view that where, as here, high-ranking employees have pleaded guilty for conduct attributable to the employer, the employer must be prosecuted. Heritage seems to have benefited from the importance of affordable generic drugs to the U.S. health care system, where rising costs are a hot topic in political debates. Conviction for Heritage would likely have caused the U.S. Department of Health and Human Services to exclude Heritage from all U.S. federal health care programmes, including Medicare and Medicaid, for at least five years, meaning one less source of affordable drugs for U.S. consumers. In addition, this resolution comes at a time when DOJ Antitrust is actively promoting good corporate citizenship, which Heritage appears to have shown. Heritage facilitated the interviews of current and former employees, provided substantial cooperation to DOJ Antitrust’s investigation into it from as early as July 2016, and has implemented and will continue to implement an improved compliance programme. DOJ Antitrust wants more of its targets to focus on compliance and cooperation, and flexibility in charging decisions is one of the tools available to it in pursuing that goal.
It’s hard to say which factor ultimately tipped the balance to a DPA for Heritage. We anticipate that further enforcement activity in the open pharmaceutical investigations may provide further guidance on DOJ Antitrust’s policy shift.