Ryanair facing twin probes over its stake in Aer Lingus
The European Commission (the Commission) has launched an in-depth, Phase II review of Ryanair’s proposed buyout of its rival Aer Lingus after Ryanair declined the opportunity to offer appropriate concessions during Phase I. Ryanair currently owns 29.8% of Aer Lingus’s shares and has argued that significant synergies and cost savings would result from a full buyout. In the less time-constrained Phase II process, the Commission will be able to carry out a detailed review of the claimed efficiencies, weighing up the benefits of the buyout against the dominance that the combined entity will achieve in flights to and from Dublin, Cork, Shannon and Knock airports. The referral to Phase II means that Ryanair’s existing offer, priced at £1.03 per Aer Lingus share, has lapsed under takeover rules but Ryanair intends to re-bid on the same terms if the Commission clears the buyout.
The Phase II referral follows the Commission’s blocking in 2007 of Ryanair’s first attempt to acquire the entire share capital of Aer Lingus. Ryanair also used the “efficiencies” argument in the original bid, submitting that the buyout would result in significant “operational cost savings” resulting from the new entity’s larger scale as well as the application of Ryanair’s business model. However, the Commission rejected the “unverifiable” arguments, further pointing out that a market position approaching that of a monopoly could not be justified on the grounds that efficiency gains would be sufficient to counteract its potential anti-competitive effects.
Aer Lingus has stated that it is a much stronger airline today than in 2007 and the reasons for rejecting the latest bid are more emphatic than they were in the first EU review. As a result, it is thought that Ryanair’s chances of obtaining EU approval this time round will rest largely on whether new entrants can be attracted to take up slots and compete with the merged entity on routes to and from Ireland. Ryanair has said that it is willing to offer “appropriate remedies”, but may need to convince the Commission that competitors will in fact take up vacant slots. The situation is complicated by the fact that a merged entity would have a very large base at Dublin airport and access to customers through well-established brands. Ryanair’s local knowledge of the market, as well as its history of aggressive price-cutting, may itself prove the most formidable barrier to entry to new potential competitors.
In the UK – where the competition regime gives the competition authorities the power to investigate minority shareholdings falling short of conferring what the EU Merger Regulation calls “control” – Ryanair is faced with a Competition Commission (CC) investigation into the 29.8% stake in its rival (further details can be found in the Briefing Note “Minority shareholdings: an EU enforcement gap?”). This is despite Ryanair’s submission to the Competition Appeal Tribunal (CAT) that it is inappropriate for the UK authorities to review the minority stake when the proposed buyout is under review by the European Commission. Ryanair argued that its 29.8% stake was fundamental to the EU’s review of its public bid and, as such, to avoid conflicting decisions it was not appropriate for various regulators to look at the same issue simultaneously. The CC, submitted Ryanair, was “considering whether to undermine on competition grounds the very foundation of the concentration which the European Commission is considering”.
The CAT rejected Ryanair’s case, stating that the ongoing EU review did not mean that the national review into the minority stake should be suspended. This was not, stated the judge, a case of “overlapping jurisdictions” and there was no prospect of the exclusive jurisdiction conferred on the European Commission by Article 21 of the EU Merger Regulation extending to the minority holding. The “duty of sincere cooperation” between competition authorities should not preclude the CC from taking any further steps in the investigation, as Ryanair had argued. However, the judge ruled that the CC would be prevented from taking a final decision that would or could conflict with the European Commission’s determination of the full bid. Aer Lingus said that it welcomed the decision. Ryanair has appealed the matter further to the Court of Appeal. As matters stand the CC is expected to rule on 19 November 2012 and the European Commission on 6 February 2013.
Barclays settles but Libor and Euribor investigations continue
Seven banks are being questioned by US regulators about their involvement in the alleged manipulation of the Libor inter-bank lending rate, which is used as a reference to price trillions of dollars of financial products. Barclays, HSBC, Royal Bank of Scotland, Citigroup, Deutsche Bank, JP Morgan and UBS all received subpoenas from the Attorneys General of New York and Connecticut.
This follows Barclays’ admission of misconduct in relation to the illegal setting of Libor rates from as early as 2005 onwards. On 27 June, Barclays paid fines totalling £290m to the Financial Services Authority, the US Department of Justice and the US Commodity Futures Trading Commission. The US investigation is operating on the assumption that at least one other bank must have colluded with Barclays in any attempt to manipulate the Libor rate. It follows reports that six of the seven banks were considering a group settlement with regulators to avoid the Barclays-style backlash generated by the imposition of individual fines.
While the US investigation is focusing on fraud and financial regulation, the concurrent probe by the European Commission into the setting of the Euribor and Libor inter-bank rates is approaching the arrangements from an antitrust perspective. The Commission’s probe of the Euribor benchmark rate began in October 2011 when the premises of a small number of banks including UBS and Royal Bank of Scotland were inspected. The probe is understood to partly focus on forward-looking contracts, which are designed to yield future profits for the banks further down the line. The investigation was subsequently extended to Libor.
The EU Competition Commissioner, Joaquin Almunia, declared in July 2012 that the alleged rigging of rates was a “major competition concern” and warned that if the probe found a breach of antitrust rules he would “take the necessary actions to bring these practices to an end and prompt a change of culture in the banking sector”.
It has subsequently been reported that three banks under investigation for rigging the Euribor rate are co-operating with the Commission in the hope of benefiting from leniency and lower fines. The decision by the three banks to disclose more about their knowledge could be seen as an admission of wrongdoing and illustrates growing nervousness that they face a heavy penalty. Such an admission could also leave the banks vulnerable to private actions by third parties.
Apple/Samsung ruling raises the issue of interagency cooperation over tech disputes
A US federal court jury has ruled that Samsung infringed Apple’s rights to the innovative technology used to create the revolutionary iPad and iPhone, and has ordered Samsung to pay $1bn in damages. This was less than the full $2.5bn that Apple demanded but nevertheless represented a landmark victory for the US technology giant, which can now formally demand that Samsung pull its most popular mobile phones and computer tablets from the US market. Samsung was found to have infringed Apple’s ’381 “bounceback” patent in all of the 21 devices in question, and the ’915 “pinch and zoom” patent in 18 out of 21 devices. More damningly, the jury held that Samsung executives either knew or should have known their products infringed on the listed patents.
The outcome of the case is likely to have ripple effects in the smartphone market. After seeing Samsung’s legal defeat, other device makers relying on Android may become more reluctant to use the software and risk getting dragged into court. “Some of these device makers might end up saying, ‘We love Android, but we really don’t want to fight with Apple anymore,” said Christopher Marlett, CEO of MDB Capital Group, an investment bank specialising in intellectual property.
Apple and Samsung have filed similar lawsuits in eight other countries, including South Korea, Germany, Japan, Italy, the Netherlands, Britain, France and Australia. “This is not the final word in this case or in battles being waged in courts and tribunals around the world, some of which have already rejected many of Apple’s claims,” Samsung said in its statement. It has been reported that Samsung is considering suing Apple for infringing a patent on 4G LTE technology in the new iPhone 5, although Samsung has refused to comment on the speculation.
The prospect of contrasting court decisions in different jurisdictions raises the possibility that Samsung will be forced to withdraw products in some countries, but not others. The situation evokes memories of the long-running Mars/HB dispute in which Mars sought to prevent HB, now owned by Unilver, from forcing retailers to only stock HB-branded products in freezers supplied free of charge or at a nominal rent by HB to retailers. Some competition authorities ruled in HB’s favour and others in Mars’ favour, which meant that the arrangements had to cease in some jurisdictions but not in others.
As a way of minimising inconsistencies in the more recent tech disputes, the US Department of Justice (DoJ) has announced that it is in contact with the European Commission to coordinate its policy approach on intellectual property issues. This co-operation has already been demonstrated in relation to Google’s purchase of Motorola Mobility’s patent portfolio, the ebooks antitrust probe and the review of United Technologies’ purchase of Goodrich. Although each agency has its own procedures and framework, the DoJ emphasised that “there is substantial dialogue…[as] we seek to understand the effect of these practices, particularly in the high-tech industries.”
OFT responds to BIS consultation on private actions
The UK Office of Fair Trading (OFT) has published its response to the consultation issued by the Department for Business, Innovation and Skills (BIS) which set out options for reforms to facilitate private actions in competition law.
The OFT strongly supports the proposals, emphasising as a general point that the ability of businesses and consumers to bring private actions will complement public enforcement. Although the OFT considers that it is vital that strengthening private actions should not undermine the role played by the public competition authorities, it notes that making it easier for private parties to seek redress will not necessarily have an effect on the authorities’ approach to decisions or processes.
The OFT responds to BIS’s specific proposals in the following ways:
- Extending the powers of the Competition Appeal Tribunal (CAT) so that it can hear stand-alone damages actions: the OFT agrees that the High Court should be able to transfer cases to the CAT, although queries whether the CAT would have the resources to become an exclusive venue for collective private actions. The OFT strongly supports the principle that the CAT should be empowered to hear applications for injunctions in competition law cases.
- Introduction of a fast-track procedure in the CAT to allow SMEs to resolve simpler cases quickly: the OFT broadly supports the principle and agrees that the focus should be on providing fast track access to injunctive relief rather than damages. However, the OFT raised various issues including whether non-SMEs should also be able to benefit from the procedure, and whether there would be safeguards to ensure that the rights of the defendant would be protected under such a procedure given the complex nature of competition cases.
- Rebuttable presumption of loss in cartel cases: the OFT supports the proposal to introduce a rebuttable presumption that the overcharge resulting from cartels is 20% as this should make claims more straightforward. However, it notes that as 20% is only a median figure the parties should be able to adduce evidence that the overcharge was higher or lower (as appropriate).
- Opt-out collective actions regime: the OFT strongly supports the possibility of opt-out collective actions to allow businesses and consumers to obtain redress in both followon and stand-alone cases, although notes that appropriate safeguards should be in place to avoid abusive litigation.
- Encouraging ADR: the OFT supports encouraging parties to use alternative dispute resolution (ADR) on a voluntary basis. It agrees with the suggestion that it should be given a role to facilitate voluntary redress schemes, although it considers that doing so should not be seen as a substitute for encouraging private actions.
- Costs and funding: the OFT considers this deserves wider discussion than in BIS’s document. It notes that costs and funding arrangements must strike an appropriate balance between removing disincentives for claimants to bring meritorious claims and avoiding unfairness to defendants. Cost capping may be relevant in all types of action but there may be merit in codifying the criteria and the procedure for cost-capping orders.
Hong Kong Competition Ordinance finally enacted
After years of legislative debates and trimming drafts of the Competition Bill to address objections from different interest groups, the Hong Kong Competition Ordinance was finally enacted on 14 June 2012 and will come into force in 2014.
The Ordinance will prohibit anti-competitive agreements and abuses of dominance that will have an effect in Hong Kong. This means that even if the parties, agreement or conduct are based, signed or agreed outside Hong Kong, the matter can still be investigated as long as there is some form of anti-competitive effect in Hong Kong. An anti-competitive contract can be found to have effects in both Hong Kong and China. The Ordinance does not introduce general merger control.
The First Conduct Rule prohibits any kind of arrangement which negatively affects competition in Hong Kong. This may include “hardcore” violations such as price fixing or market sharing, or alternatively other types of anti-competitive agreements that are likely to include joint procurement and collective boycott which are not “hardcore” but can nevertheless be subject to a warning prior to prosecution. Vertical arrangements such as resale price maintenance will also be caught by the First Conduct Rule.
The Second Conduct Rule prohibits companies with a “substantial degree of market power” from abusing their power to prevent, restrict or distort competition in Hong Kong. The legislation leaves the definition of such abuses fairly open but it seems likely that as in other jurisdictions a wide range of behaviour will be caught including predatory pricing, production quotas, fidelity rebates, refusals to supply and exclusive dealing.
Further details can be found in the Briefing Note “Competition Law for Hong Kong”.
OFT turns attention to petrol and diesel prices
The UK petrol and diesel retail market, which is worth £32bn a year, is to be investigated by the OFT after consumer groups voiced widespread concerns that consumers are paying over the odds for fuel. After a 38 per cent and 43 per cent rise in the price of petrol and diesel respectively between June 2007 and June 2012, consumers are now paying near record levels. Indeed, the level of 142.5p per litre of petrol reached in April against the backdrop of threatened strikes by tanker drivers was the most expensive on record.
The OFT will therefore look at whether or not falls in the cost of crude oil are being passed on to drivers at the pumps. It will also investigate whether supermarkets and major oil companies’ practices may be making it more difficult for independent retailers to compete with them; whether there is a lack of competition between fuel retailers in some remote communities in the UK; and whether concerns about price co-ordination and the structure of road fuels markets identified by other national competition authorities are relevant in the UK.
The OFT has issued a call for information and will gather data over the next six weeks, with plans to publish its findings in January 2013. Claire Hart, Director in the OFT’s Services, Infrastructure and Public Markets Group said that the review would “provide an opportunity for people to share their concerns and evidence with us. This will help us determine whether claims about competition problems are well-founded and whether any further action is warranted.”
OFT to review the personal current account market
The OFT has launched a review into the personal current account (PCA) market to establish how it has evolved since the OFT’s market study into the sector was published in 2008. The review will address whether the initiatives which the OFT agreed with the banks have been successful in improving the switching process, increasing the transparency of account charges and allowing people to manage their accounts more effectively.
This is after the 2008 market study found three main problems with the PCA market. First, there were low switching levels and real and perceived difficulties in switching between PCA providers. This was partly due to the complexity and lack of transparency of PCAs, which meant that the visible benefits to consumers of switching were relatively small even though the actual benefits could be substantial. Second, there were low levels of transparency of PCA charges and other costs. Many consumers were not aware of the key fees associated with their account such as credit interest fees. Third, there was a lack of simple mechanisms for consumers to control, or opt out of, an unarranged overdraft. Low-income, low-saving consumers who tended to incur insufficient funds charges effectively crosssubsidised higher earning consumers who did not. In essence, the OFT considered that “the market may be stuck in an equilibrium that does not work well for many consumers”.
The OFT’s review forms part of a wider programme of work designed to achieve a more competitive and consumer-focused banking retail banking sector. The OFT intends to separately consider the operation of payments systems and the banking market for small and medium-sized enterprises. The programme of work is aimed at informing the OFT’s response to a recommendation from the Independent Commission on Banking in September 2011, which stated that the OFT should consider making a market investigation reference to the Competition Commission by 2015 if sufficient improvements in the market had not been made by that time.
Merger regime round-up
In the Czech Republic, the Chamber of Deputies of the Czech Parliament has approved an amendment to the current Czech Competition Act. The amendment is now subject the approval of the Senate, the upper house of the Parliament and is expected to become law by the end of 2012. They key changes to be introduced include:
- the introduction of leniency proceedings into the Competition Act.
- the introduction of protection from personal criminal exposure for applicants that meet the conditions for leniency.
- the introduction of specific procedural rules for access to the file in leniency proceedings.
- a more precise definition of content of an authorisation to conduct a dawn raid.
- liability of successor undertakings to fines will cease.
- discretion for the Competition Office to not pursue alleged infringements if there is no public interest justification.
In New Zealand, the Commerce (Cartels and Other Matters) Amendment Bill has passed its first reading in the New Zealand Parliament and has been referred to the Commerce Committee. The Bill aims to deter hard-core cartel conduct by clarifying the scope of the prohibition against hard-core cartels and introducing criminal sanctions for serious offences.