Focus on the US
In the wake of the 2016 elections, we now await the decision as to who will be the "antitrust guard" at the top of the US Department of Justice (DOJ) and the Federal Trade Commission (FTC). At the time of writing, President Trump had not yet named any members of his team to run the Antitrust Division or announced who will be named to the several openings as Commissioners of the FTC. With these significant appointments not yet known, a Republican (at least in name) controlling the Executive Branch, and a worldwide shift towards nationalism instead of globalization, we anticipate the following significant antitrust enforcement issues in 2017:
Pharmaceutical pricing and marketing will be under heavy fire in 2017, as investigations by both the DOJ and FTC, and private lawsuits in this area have exploded and will continue to explode. The attack on the industry is bipartisan, as price increases in the industry are considered to be unjustified by members of both parties at all levels and continue to be attacked. While unilateral pricing behavior is not usually the subject of antitrust challenges, the agencies are likely to push the envelope here. The DOJ's ongoing probes of generic drug pricing include virtually the entire industry. The FTC, state attorneys general, and private plaintiffs are all expected to continue to aggressively pursue conduct by pharmaceutical companies, particularly at the expiration of patent life. "Reverse payment" challenges based on the US Supreme Court's FTC v. Actavis decision and on the lower court decisions (particularly antitrust challenges concerning forms of consideration other than cash payments), will continue to encourage government and private suits.
Merger enforcement activity and matters to watch
Big wins in recent years should encourage the staff at the DOJ and FTC to continue to focus on mergers and to bring enforcement actions based on narrow market definitions—unless the new administration has different ideas and appoints leadership with a different agenda. Investigations have resulted in parties abandoning or being enjoined from consummating major acquisitions. Time will tell if companies will test the new administration on merger enforcement. The DOJ and the FTC actively sought to block or reshape combinations in 2016, and our "crystal ball" does not see much significant change in 2017. Among the most notable matters in 2016 were the DOJ's Antitrust Division decisions to attempt to stop the two proposed mergers of the largest health insurance companies, and the FTC hospital merger challenges across the country.
Among the merger reviews and challenges that are already on the docket and worth watching are the: Anthem/Cigna and Aetna/Humana transactions. In July 2016, the DOJ sued to block both Anthem Inc.'s US$54.2 billion bid for Cigna Corp. and Aetna Inc.'s US$37 billion bid for Humana. These merger challenges will be decided by district court judges in Washington, DC, likely in early 2017, with a strong possibility that the losers in those cases will appeal. The two deals raise different competition issues. The DOJ contends that the Anthem/Cigna deal will harm or even eliminate competition to sell insurance plans to large, nationwide employers or those who need large regional networks, and increase the bargaining power the combined entity will have with providers. In the Aetna-Humana deal, meanwhile, the DOJ worried that seniors who rely on Medicare Advantage plans would lose out on the benefits of competition. The DOJ has also claimed the merger would limit competition for individual plans sold on Affordable Care Act public exchanges, though Aetna has said it decided to leave those exchanges as a result of how poorly the business had done as opposed to the merger review. The Aetna/Humana deal raises issues as to whether competition will be harmed in the Medicare Advantage market.
The FTC will continue to scrutinize technology industries
Given the Russian, Chinese and other "hacking" allegations and certainties, scrutiny of technology industries by both the competition and consumer protection bureaus of the FTC will continue with vigor and there will be a continued focus on privacy, big data and data security.
Stiff criminal fines and jail time against price-fixers will continue
The DOJ continues to seek and obtain large criminal penalties for cartel activities. Billions of dollars in fines sought and obtained against companies and significant jail time for the individuals involved continued in 2016, and there is no reason to think there will be a change in worldwide cooperation or enforcement in 2017. No industry is immune, with the advertising industry being the most recent in the DOJ's crosshairs. Any company without a vigorous antitrust compliance program that is not only in effect, but also regularly updated and enforced, is playing with fire.
In December 2016, the DOJ announced its Packed Seafood Cartel investigation snared its first victim when Walter Scott Cameron, a vice president of Bumble Bee Foods, pled guilty to allegations that he participated in a conspiracy to fix seafood prices in the US. A second Bumble Bee Foods vice president, Kenneth Worsham, agreed to a guilty plea shortly thereafter. In 2015, Thai Union Frozen Products publicly disclosed the DOJ's investigation into the packaged seafood industry when it announced a planned acquisition of Bumble Bee Foods would not go forward given the government’s competition concerns. The investigation has also sparked lawsuits by private parties, including Wal-Mart's antitrust suit in an Arkansas federal court that accuses Bumble Bee Foods, StarKist and Tri-Union Seafoods of conspiring to fix prices for packaged tuna.
In December 2016, the DOJ accused two former top Heritage Pharmaceuticals executives of plotting to fix prices for antibiotics and diabetes treatments. A Philadelphia district court unsealed a pair of two-count felony charges against Jeffrey Glazer, the former CEO of Heritage Pharmaceuticals, and Jason Malek, the firm's former president, for conspiring to fix prices, rig bids and divide up customers for doxycycline hyclate, an antibiotic used to treat respiratory tract infections (among other conditions), and glyburide, an oral diabetes medication. The next day, 20 states announced a lawsuit against Heritage Pharmaceuticals, Mylan and four other generics makers, alleging the companies conspired to fix prices and constrain competition for the two drugs. The lawsuits arise out of a DOJ investigation into the generics sector and are a direct result of an industry under heavy scrutiny for high prices. More suits are likely to follow.
An antitrust case to watch
The DOJ and the State of North Carolina sued Carolina’s HealthCare System (System), claiming that the System used its dominant market power to prevent Aetna, Cigna and other major health insurers from steering patients to lower-cost hospitals. This is the DOJ’s first in the healthcare arena on anti-steering issues. The complaint alleges that the System has rules that include prohibitions on (a) narrow insurance networks of only the System's competitors; and (b) tiered networks placing competing hospitals into the same top tier as System hospitals.
Focus on UK and Brexit
What Brexit means for competition enforcement
The UK has its own national competition law, prohibiting anti-competitive agreements and abuses of dominance, which affect trade in any part of the UK. These prohibitions are identical to the EU prohibitions (except that the latter apply to trade between Member States), and domestic and EU law both ensure that the UK's primary competition authority, the Competition and Markets Authority (CMA), draws the same conclusions on matters of law and fact as the European Commission (Commission). Eurosceptics should note that the UK voluntarily yoked itself to Commission precedent before it was compulsory to do so, in order to help ensure legal certainty on matters of competition law.
EU competition law has become a model for much of the world and it is highly unlikely that the CMA would want to forge its own path with regard to the vast majority of this jurisprudence. With one exception, that is: vertical restraints.
Much EU competition law on vertical restraints, i.e. restrictions to competition agreed between parties at different levels of the distribution chain, has been driven by the Commission's mission to bring about the Single Market. Practices such as dictating the price, or territory where a distributor is allowed to make sales are permissible in other jurisdictions with competition law, but not the EU. The Commission has done this in part to help create the Single Market: ensuring that distributors are able to sell freely from one Member State into another.
The Commission has extended its case law in this area to the point where restrictions of intra-brand competition (e.g. between two distributors of Nike trainers) are regarded as being as serious as restrictions of competition across entire markets (e.g. across all brands of trainers). The zeal of Member States' authorities in enforcing this interpretation of competition law has also made it very difficult for suppliers to apply different conditions to online and offline selling: a practice which allows suppliers to recognize the additional costs borne by traditional "bricks and mortar" retailers and the additional benefits conferred to the supplier of its goods being put on display. Many have argued that this has been a step too far. Brexit offers an opportunity for the UK's Competition and Markets Authority to step back from enforcement in this area and focus instead on violations of competition law that have more demonstrable effects.
The Commission is a "one stop shop" for evaluating and clearing mergers in 31 countries where the merging parties reach the relevant EU and worldwide turnover thresholds. Once it is notified of a transaction, the Commission takes over evaluation of the merger and its effects, not just for the EU Member States, but for the whole EEA (i.e. the 28 current EU Member States, plus Norway, Iceland and Liechtenstein).
Brexit will mean that UK turnover will no longer count towards the EU turnover thresholds, so the number of transactions notified to the Commission will fall slightly. As with competition enforcement, should the UK remain in the EEA or enjoy an equivalent relationship with the remaining 27 Member States, the Commission will probably continue to evaluate the effect of the merger within the UK, negating the need for a separate UK filing. Our expectation, however, is that parallel notifications will be needed in the UK and EU.
The CMA already operates its own system of merger control, for transactions which meet the UK's domestic thresholds but not the EU's thresholds. A merger notification is, in theory, voluntary, but since the CMA can intervene and require divestments post-completion, merging parties are likely to make a notification if there is a potential impact on competition. According to the Law Society of England and Wales, based on the mergers filed with the EU in 2015, a further 50-75 cases will come under the jurisdiction of the CMA absent the Commission's one-stop-shop. Were all of these notified, this would increase the CMA's total merger control caseload by roughly 50 percent, which it would be unable to cope with at its current levels of staffing. Unlike the Commission, the CMA charges merger filing fees, of up to £160,000.
EU State aid law prohibits subsidies to businesses which distort the Single Market. The State aid rules have their origin in one of the EU's predecessor bodies, the European Coal and Steel Community, and have not been widely adopted outside the EU. Does this mean that a post-Brexit UK will dispense with State aid law? Probably not.
While there was much talk about a post-Brexit UK providing a low-tax refuge for companies, any tariff barriers between the UK and the Single Market would likely negate any corporate tax advantage gained by shifting a business' profit-making activities in Europe to a low tax, State aid-free UK. For most businesses, a comprehensive trade agreement would be needed in order for the UK to be a profitable hub to do business into the rest of Europe. However, historically, where the Member States of the Single Market have (via the EU) entered into comprehensive trade agreements with other countries, these agreements have generally included State aid-type obligations, with similar prohibitions on subsidies to businesses. For example, the Accession Agreements between the EU and the Balkan States effectively require the latter to set up domestic authorities that mirror the Commission's State aid enforcement role, while the Free Trade Agreement and Air Transport Agreement between the EU and Switzerland both contain State aid-type rules for Switzerland to follow.
The notable exception to the EU's "no comprehensive trade deal without State aid" rule is Canada’s Comprehensive Economic and Trade Agreement (CETA) with the EU, which does not contain any specific state aid provisions.
Focus on Europe
Private enforcement of competition law in Europe comes of age
Private enforcement of competition law in the EU has historically been weak, with plaintiffs preferring to make complaints to the competition authorities (on the rare occasions that they took any action in the face of violations of competition law). However, in the UK over the last six months, the trend towards private enforcement has begun to gather pace.
The UK supermarket, Sainsbury's, successfully claimed last summer that the interchange fees charged by the MasterCard credit card scheme amounted to an anticompetitive agreement by effect. The Competition Appeal Tribunal (CAT), the forum where the Sainsbury's claim was heard, was only given the right to hear "standalone" competition damages actions (i.e. those not following on directly from the decision of a competition authority) in October 2015.
The verdict turned what had been a fairly steady stream of competition claims against card schemes in the UK courts into a feeding frenzy. Even though these claimants are large sophisticated businesses, for most of them this is the first competition damages action in which they have been involved.
As well as gaining the power to hear standalone competition damages actions in October 2015, the CAT was also given new jurisdiction to hear "opt-out" class actions claiming competition damages in the UK. While the opt-out class action regime (where a person is given permission to bring a claim for every member of a particular class, regardless of whether all of those members have given their consent) is well established in the US, these reforms are the first-time opt-out class actions have been allowed for any cause of action in the UK.
An ambitious opt-out class action is being brought against MasterCard, on behalf of every resident in the UK over the age of 16 years who made purchases between 22 May 1992 and 21 June 2008. The claim is being billed as the largest ever amount claimed in the UK's courts. It is not a standalone action, but follows on from a previous Commission infringement decision against MasterCard. A hearing is being held on 18-20 January 2017 at the CAT to determine whether or not this claim can proceed.
Within the UK, the CAT has two big advantages: the waiting time between bringing a case and having it heard is shorter than in the non-specialist courts and there are no fees for bringing a CAT claim (whereas Court fees for almost every other cause of action in the UK have increased substantially in recent years). Additionally, the English Court system has other advantages over other systems within the EU, such as a disclosure system which allows claimants to retrieve extensive information from defendants to help prove their claims, and a "loser-pays" costs system which allows some (albeit, in practice, by no means all) legal fees to be recovered by the successful party.
The consensus is that, having brought successful competition claims, UK retailers may well come back for more. However, with Brexit, the position of the UK's CAT as forum of choice for EU-wide competition claims is under threat. As an EU Member State, the UK currently benefits from the Brussels Regulation on the mutual recognition and enforcement of judgments. Crucially for competition claims, which typically involve multiple purchaser-claimants and seller-defendants across several EU Member States, the Regulation allows a single action to be brought in a single Member State, to which claimants can join defendants from across the EU. The extent to which a claimant will, post-Brexit, be able to bring a claim in the UK against defendants across the EU and enforce it, is unclear.
The taxing question of State aid
The State aid ruling of the Commission against Ireland has brought the EU's State aid rules into the spotlight.
One way of attracting the ire of the Commission is to do something which the Commission believes undermines the Single Market. The Single Market is not just a free trade area or a customs union: its aim is to reduce all barriers to trade, including regulatory barriers, merging 31 national markets into one. Member States of the Single Market (the 28 EU Member States, plus the three EFTA States - Norway, Liechtenstein and Iceland) cannot raise tariff barriers to protect domestic industries from being undercut by competitors who are subsidised by foreign governments elsewhere in the Single Market.
Instead, the Commission (and EFTA Surveillance Authority for the EFTA States) enforces State aid law. This attempts to rein in subsidies which are harmful to the businesses which do not receive them and authorize others deemed to have a positive effect on the Single Market. While State aid enforcement historically targeted direct subsidies, the Commission has now turned its attention to indirect subsidies, through tax revenues forgone, enjoyed by multinationals. In particular, it has investigated tax rulings by Member States in relation to multinational companies.
According to the Commission, 23 EU Member States make active use of tax rulings. The Commission has examined around a thousand such rulings and at the time of writing had three State aid cases into three rulings open: Amazon, McDonald's and GDF Suez Group (now Engie).
However, the Commission's ruling against Apple's tax affairs in Ireland is the case that made global headlines, in part due to the size of the repayment required. Apple's €13 billion "penalty" is a repayment, not a fine. Remedies under State aid law aim to "correct" the harm done to the Single Market, through requiring that the unlawful subsidy be repaid with interest. Even though the Irish State committed the infringement, it is first in line for this €13 billion (although the Commission has also said that the payment may have to be divided between other Member States, it has not concluded on this point).
One side effect of the Single Market is that it lends itself to a race to the bottom on taxes among Member States. As location within the Single Market is no barrier to trading with customers anywhere in the Single Market, it makes sense to establish a business' base of operations in the Member State with the lowest corporate tax rates. Member States are free to set their own corporate tax rates and to provide tax rulings to multinationals as regards the legality of their tax arrangements.
But at what point do tax rulings become a selective advantage that amounts to State aid? Or to frame the question politically rather than legally, where does a Member State's autonomy to set its own taxes end as a result of its Single Market Membership? These are questions raised by the Commission's multinational tax State aid cases.
In relation to Apple, customers purchasing from Apple in Europe, the Middle East, Africa and India did not make purchases from a local Apple subsidiary (even where buying over the counter at their local Apple Store). Instead, they purchased from one of two Apple entities incorporated in Ireland, benefitting (within the EU) from the Single Market, which allowed for the duty-free transfer of the products from the relevant Irish entity to customers. So far, so good. This is the Single Market operating as it should: businesses can establish themselves in one Member State and trade with customers in other Member States without needing to establish themselves in those other Member States.
The Commission took issue with what happened next. The Apple entities allocated their profits to their "head office", rather than to Ireland, meaning that they did not have to pay corporation taxes on their profits in Ireland but rather the location of the "head office". Thanks to a quirk in Irish tax law (now revoked) the head office did not exist and corporate taxes on the majority of the Apple entities' profits went untaxed. These structures were endorsed by several tax rulings issued by the Irish tax authorities, holding that the arrangements were compliant with Irish tax law.
The Commission decided that the Irish tax rulings endorsed what it referred to as an "artificial" internal allocation of profits, with no factual or economic justification, given that only the Irish branches (and not the head offices, which did not exist in any physical location) were capable of activities which generated income from trading.
The Commission's Apple State aid decision was only published in December 2016. Before then, there was a lot of heat, but not much light, regarding the decision. Much commentary rather missed the point. Many argued that the Commission had no business interfering in the tax affairs of sovereign States, though it is well established that it does, where those tax arrangements amount to State aid. Others have incorrectly suggested that it is Ireland's low rate of corporation tax which is under attack.
The Commission’s decision is not without controversy - far from it. One key ground of appeal is likely to relate to the extent to which the Commission has relied on OECD guidance in determining that the tax rulings in Apple were effectively a sham. The Irish Government suggested both during the Commission's investigations and after the decision was reached that it is unjust to judge the Irish Government's tax rulings on Apple's tax affairs by the standards of OECD Guidelines that are non-binding and were published after the tax rulings in question were given. The Commission accepts the non-binding nature of the OECD Guidelines, but regards them as "useful guidance" for Member States in determining whether or not a "market-based outcome" has been reached by the multinational company and endorsed by the tax authority. It is, however, arguable that the Commission's decision has effectively turned the "useful guidance" into a retrospective requirement, as the Commission has used the "arm's length principle" for transfer pricing set out in the OECD Guidelines and taken the Irish authorities' failure to follow this principle as determinative of the presence of a selective advantage (and, therefore, State aid).
To cut through all of this, however, the lesson of Apple is very simple. If a Member State is offering a deal that seems too good to be true, there is a risk that the Commission (or EFTA Surveillance Authority) will rule that it was, in that it contained unlawful State aid which must be paid back. If a Member State offers a deal that appears to game the Single Market in the interests of multinational companies, the authorities will be doubly interested. Apple's tax affairs were subject to just two tax rulings in a 25-year period. The first ruling reviewed by the Commission's decision, lasted from 1991 to 2007, during which Apple's business grew exponentially and changed from that of a niche personal computer manufacturer into a leading supplier of personal electronics (with products that would have been considered science fiction at the time of the first Commission ruling). Businesses in similar situations should take a second look at their tax arrangements in order to assess the risks.
A final word on Brexit: several commentators have suggested that Brexit will mean that the UK will be free to offer competitive corporation tax deals to multinational companies free from the State aid rules and that this will drive growth for an "independent" UK. Unfortunately, this suggestion does not stand up to scrutiny. The reason a company may incorporate in Ireland and not in a tax haven further afield is that it could use the Single Market to sell from Ireland directly to customers in other Member States without having to worry about tariff or regulatory barriers. A business in a similar position outside the Single Market and faced with tariff and non-tariff barriers would likely find that, no matter how low the rate of corporation tax in the country of incorporation, this would be outweighed by the costs of accessing the Single Market.
E-commerce inquiry by the European Commission
On September 15, 2016, the European Commission (Commission) published its Preliminary Report (the Report) on its E-Commerce Sector Inquiry, which examines market trends and potential barriers to competition in e-commerce in goods and digital content.
The nearly 300-page Report was compiled from voluntary responses to the Commission's questionnaires sent to online retailers, marketplaces, price comparison tools, payment system providers and manufacturers and, for the digital content section, digital rights holders and providers of online content services. A number of those responding supplied copies of their licensing and distribution agreements. In some cases, the responses exposed potentially anti-competitive business practices, which could lead to fines of up to 10 percent of global group turnover.
The inquiry is part of the Commission's Digital Single Market strategy, and according to the Report, aims at "obtaining an overview of the prevailing market trends, gathering evidence on potential barriers to competition linked to the growth of e-commerce and understanding the prevalence of certain, potentially restrictive, business practices and the underlying rationale for their use" in the largest e-commerce market in the world.
The Report’s key findings relating to e-commerce in goods include the following:
- Online price transparency is key to supplier and consumer behavior, but there are competition risks from increased price monitoring. The Commission examined evidence of manufacturers monitoring retail prices as a first step to attempt to influence retail pricing. Some retailers use automated software to monitor competitor pricing and pressure the manufacturer to liaise with their competitors about pricing. The UK's Competition and Markets Authority recently fined online poster seller, Trod Limited, more than £160,000 for agreeing with a competitor to price match using such software. Trod's managing director was disqualified as a company director for five years.
- Increased price competition has changed manufacturers' activities and conduct. The rise in e-commerce has led to more manufacturers competing directly with resellers and selling directly to the end consumer. As a result, manufacturers have increased their use of selective distribution systems and imposed more restrictions on retailers. Certain restrictions are justified where they preserve product quality; for instance, retailers may need to have at least one bricks and mortar store. Under the Vertical Agreements Block Exemption Regulation, where a territory has been exclusively reserved to one retailer, manufacturers are permitted to impose active sales restrictions on other retailers in the network so that they cannot target consumers in that territory. However, passive sales, where the retailer responds to a consumer's request (generally including online sales), must not be restricted.
- Bans on reselling via online marketplaces only prevent sales on one online channel. Such bans do not prohibit goods from being sold on all online channels, such as the retailer's own website, and so marketplace bans do not automatically infringe competition law. This Commission position contrasts with that of the German Federal Competition Office, which held that ASICS's restrictions on marketplace sales did constitute a hard core restriction of online sales. The question of whether marketplace bans are a hard core restriction on online sales has been referred to the European Court of Justice (ECJ) by the German Higher Regional Court in Frankfurt. In the absence of the ECJ finding that marketplace bans constitute a hard core restriction on online sales, the Commission will continue to assess such restrictions on a case-by-case basis.
- Cross-border sales in goods are not yet as common as the Commission would like, but this appears to be due to retailers' own strategies. A draft geo-blocking Regulation was proposed in May 2016 to ban blocking access to websites and automatic re-routing of cross-border consumers. If passed (likely to be in 2017), the Regulation will prevent retailers from blocking access to a website or imposing different sales terms based on a consumer's location or nationality, unless necessary to comply with a legal requirement.
The Commission says there may be further scope to investigate pricing restrictions, restrictions on online sales and territorial restrictions in relation to goods. This signals more investigation and enforcement activity by the Commission (and national competition authorities) in this area.
The Report’s key findings regarding e-commerce in digital content include the following:
- Unlike goods, geo-blocking for digital content reflects contractual restrictions. While the extent of geo-blocking varies widely across Member States and by type of digital content, almost 60 percent of digital content providers are contractually obliged to geo-block.
- Online rights are often sold on a Member State (national) basis and/or bundled with other transmission rights. Content may not be available in all Member States, and may not have the same appeal in different territories when language barriers and different consumer tastes are taken into account. In almost 80 percent of agreements, online rights are bundled with other rights, requiring a higher outlay for smaller companies, particularly online-only content providers which do not use these additional rights.
- The length of licensing agreements may also constitute a market barrier for small companies or new market entrants. More than half of licensing agreements last between 25 and 60 months, although the average duration varies with content type. Some existing content providers have bid matching rights or the right of first refusal to renew a licence. The Commission appeared to consider bid matching favourably, as it increases market transparency. The incumbent licensee can understand who its competitors are and how much its competitors are prepared to pay for content. This conclusion may surprise competition lawyers.
- Given the findings, the Commission considered it may be more appropriate to assess potential restrictions on competition arising from licensing practices on a case-by-case basis.
The final report is due to be published in the first quarter of 2017.
Big Data and social media: competition, privacy and consumer protection
Since the Commission first outlined its strategy on Big Data in 2014, Big Data has continued to rank highly on the agenda of a number of European and national regulators. A number of themes have emerged over the past few years and may be further developed in 2017.
Big Data may be broadly characterized as a large volume and variety of personal data—a record and source of information held by a company about matters like an individual's location, personal contacts and behavior. Individual users often provide access to their personal data in return for access to social media and other applications, with the recipient company using Big Data for targeted advertising, marketing and pricing. Given the personalized nature of the information, a company holding a large volume of Big Data may find itself holding a unique asset which is very hard to replicate.
EU Competition Commissioner Margrethe Vestager has suggested that the possession and control of unique data sets should be scrutinized by competition enforcement bodies to avoid companies exploiting such data to exclude their competitors from the market. This statement echoed the findings of a joint study by the national competition authorities in France and Germany, which found that data could create market power where it cannot be reproduced and if the scale of data collection is important. In such a scenario, a competitor would need the infrastructure, as well as the customer base, to create an equivalent data set.
The Commission examined whether the acquisition of another firm's data could confer market power in Facebook's 2014 takeover of WhatsApp. The merger was cleared, with Facebook informing the Commission that it was unable to match data between a consumer's Facebook and WhatsApp accounts. But in 2016, WhatsApp announced that it would link WhatsApp phone numbers with those held on Facebook accounts. The Commission is currently investigating whether Facebook provided incorrect or misleading information during the merger investigation. Facebook has until January 31, 2017, to respond to the Commission. The Commission could fine Facebook up to one percent of its turnover if it finds that Facebook broke the procedural rules which apply to EU merger notifications.
The interface with data privacy and consumer protection
Facebook's statement that it could not match data with WhatsApp was arguably not integral to obtaining merger clearance in 2014. The Commission stated at the time that privacy-related concerns were subject to EU data protection laws, not merger control. Nonetheless, the Facebook/WhatsApp case highlights the value of data in a merger control context. As a result, the Commission is currently consulting on whether a deal-size threshold should be introduced in merger reviews, to ensure that data-rich transactions do not escape merger scrutiny. At present, mergers are only notifiable in the EU if they meet the relevant turnover thresholds. A deal-size threshold would capture the value of technology and other companies despite the fact that they have yet to achieve significant revenues.
The European Data Protection Supervisor (EDPS) has issued an opinion stating that merger laws should protect privacy, data protection and freedom of expression. It also highlighted a broader competition risk that a dominant company could exploit consumers who do not understand the type and extent of data being collected. Where unfair terms and conditions are applied by a dominant company, the EDPS's view is that this is both a consumer protection and competition issue.
Commissioner Vestager noted in her speech on data in 2016 that less than a quarter of Europeans trust online businesses to protect their personal information, and 81 percent of individuals feel that they do not have complete control over their personal data online. While the primary responsibility lies with data protection regulators, Vestager stated that competition enforcers may be able to help resolve such consumer mistrust, by ensuring that companies compete based on the data security and privacy standards that consumers expect.
Which regulator is best placed to review the transaction?
Companies are continuing to find more innovative ways to collect and use social media data. UK car insurer Admiral briefly proposed using Facebook data to give a discount of 5-15 percent based on the prospective customer's Facebook activity, using their posts and "likes." This was quickly rejected by Facebook, and the UK Information Commissioner's Office issued a statement emphasizing the importance of treating personal information fairly, even where it is shared on social media. Companies must ensure that consumers understand how their data is collected and used, again raising issues across competition, data privacy and consumer protection.
The nature of the regulatory investigations into Big Data shows that several national regulators can carry out investigations and take enforcement action. The EDPS suggested creating a Digital Clearing House as a network of regulatory bodies to share information about possible digital abusive conduct. Going forward, regulators will need to work together to ensure a harmonized approach to the regulation of Big Data across all areas – and they will need to be prepared to see this as an ongoing priority if they are to keep up with the speed of innovation in companies' use of Big Data.
Focus on China
Six antitrust guidelines to be issued
Since January 2016, the National Development and Reform Commission (NDRC) has been active in developing antitrust guidelines, the following of which are expected to be issued in 2017:
- Guidelines for the Prohibition of Acts of Abusing Intellectual Property Rights
- Guidelines on Commitments of Business Operators in Anti-monopolistic Cases
- Guidelines on the Application of the Leniency Program for Horizontal Monopolistic Agreement Case
- Anti-Monopoly Guidelines for the Automotive Industry
- Guidelines on the General Conditions and Procedures for the Exemption of Monopolistic Agreements; and
- Guidelines on the Determination of the Illegal Income Derived from the Monopolistic Acts of Business Operators and the Determination of the Fines Thereof.
These guidelines will provide companies with greater clarity on how China's Anti-Monopoly Law (AML) will be enforced.
In 2016, both NDRC and the State Administration for Industry and Commerce (SAIC), the two antitrust authorities responsible for pursuing price-related antitrust violations and non-price-related violations, respectively, investigated and penalized undertakings cases for engaging in concerted practices.
In July, NDRC fined three pharmaceutical companies for reaching and implementing monopoly agreements in respect of estazolam API tablets. In this case, the three pharmaceutical companies did not conclude a written agreement to “jointly boycott” or “increase price consensually”. One of the three pharmaceuticals did not even make an oral commitment to join the above conduct. However, NDRC determined that the three companies implemented a concerted practice because they had communicated their intentions and such conduct constituted a monopoly agreement. This is the first case in which a “concerted practice” has been found to be a monopoly agreement in practice, a significant development in China’s antitrust enforcement practice.
In addition, SAIC also published penalty decisions on three payment chipper manufacturers for reaching and implementing monopoly agreements through a concerted practice, including allocating the sales market of payment ciphers, as well as fixing and consistently adjusting the price.
Healthcare industry and automobile industry targets of enforcement
In 2016, both the healthcare and automobile industries were targeted by NDRC for antitrust investigations.
NDRC showed its determination to probe and penalize acts of monopoly in the pharmaceutical industry through its Circular on the Launch of a Dedicated Nationwide Review of the Pricing of Pharmaceuticals (Drug Price Circular), as part of an investigation campaign carried out from June 1 to October 31. NDRC has already punished three companies in the healthcare industry in 2016, two of which involve pharmaceutical firms and the other medical devices. The most recent enforcement in this industry was the penalty Medtronic received in respect of a vertical monopoly agreement in December 2016. In this case, NDRC stated that it would consistently monitor the medical device industry to prevent anti-competitive conduct in the manufacture and sales of medical devices.
In addition, NDRC circulated two rounds of questionnaires to healthcare companies. As a result, many companies in the healthcare industry have been conducting increasingly intense antitrust compliance training for senior management and employees, especially for key departments like sales and retail. They have also updated their antitrust checklists and compliance manuals in accordance with the various AML developments, such as the NDRC’s Drug Price Circular and the questionnaires noted above. Thorough internal reviews and investigations are being undertaken on legal documentation (including contracts and agreements) and business models. Many companies are engaging outside counsel to assist in self-reviews, particularly those companies that have received the second questionnaire as it focuses on those suspected of AML violations based on results from the first round.
AML enforcement in the auto industry has entered into a “new normal” phase in 2016. Although NDRC only investigated one case in this industry at the end of 2016, it will continue to keep a close eye on the auto sector. In addition, the Auto Guidelines, expected to be issued in 2017, are the only sector-specific guidelines drafted.
Competition initiatives: A fair competition review system
The State Council of China released the Opinions on the Establishment of a Fair Competition Review System in the Course of the Creation of the Market System (Opinions) on June 14, 2016. The Opinions target practices that prevent the development of a nationally-unified market with fair competition, including local protectionism, regional blockades, industry barriers, enterprise monopolies, preferential treatment in violation of laws or reductions in, or damage to, the interests of market players. They also specify the overall requirements and basic principles of the administrative review system. In addition, the Opinions clarify the scope, method, standards for, and exemptions from, the fair competition review system which is aimed at eliminating monopolistic acts by all government bodies and other organizations legally empowered to administer public affairs.
Following the Opinions, many local governments, including Jiangsu, Guangdong, Liaoning, Ningxia, and Chengdu, have circulated and published their own opinions or decisions for implementing the system. They have also established clear deadlines for evaluating and abolishing existing anti-competitive policies or regulations.
In addition, NDRC and its local counterparts published more than four cases in 2016 involving administrative monopolies in Beijing, Shanghai, Shenzhen, and another 12 provinces and cities, including Chongqing. For 2017, as the fair competition review system is rolled out, administrative monopolies should be curtailed, leading to a more competitive culture in markets in China.
Merger control: second case adopting “fix it first” approach
The Anti-Monopoly Bureau of the Ministry of Commerce (MOFCOM) has gained substantial expertise through its active enforcement and ongoing communications with its foreign counterparts. The speed of merger clearances has been greatly enhanced in recent years, especially after the introduction of the streamlined procedure for simple concentration cases in 2014. For example, MOFCOM spent an average of 24 days to clear a simple case in the first half of 2016. That said, there are still constraints on resources devoted to merger review within MOFCOM and the involvement of other agencies in the merger review process continues to delay the review process. Parties should take the notification period into account at the transaction’s inception, and try to prepare complete and convincing materials as early as possible in the merger process.
In 2016, MOFCOM, the antitrust authority responsible for merger control, released the second case of MOFCOM approval using a “Fix-It-First” approach - Anheuser-Busch InBev’s acquisition of SABMiller. The first case was NXP’s purchase of Freescale in November 2015. For concentrations with competition concerns, parties may consider this approach to gain flexibility and reduce time pressures.
Another notable development in 2016 is that Lam Research did not proceed with its acquisition of KLA-Tencor due to antitrust concerns raised by MOFCOM. Merger control considerations should, therefore, be of key importance to multinational companies planning global acquisitions.
In February 2016, the revised draft of PRC Anti-Unfair Competition Law (revised AUCL draft) was published and public opinion was solicited. In November 2016, the revised AUCL draft was passed to the Standing Committee of the National People’s Congress for deliberation and a new AUCL is expected to be published in 2017.
The revised AUCL draft improves the legal definition of unfair competition, supplements the provisions relating to combating commercial bribery, strengthens the protection of business secrets and competition in the Internet field, increases civil liability compensation, and raise fines on illegal acts.
In addition, the revised AUCL draft introduces the concept of superior bargaining position, and proposes stricter requirements for strong market players. Those with greater bargaining power (in terms of funds, technologies, market access, sales channels, or procurement of raw materials) such that it is difficult for counterparties to turn to other business operators, are likely to be in a “superior bargaining position”. Any unfair actions taken by such market players may fall under the scope of the AUCL, meaning they will be regulated by, and punished according to the law.
Enforcement against anti-competitive loyalty discounts
In November 2016, SAIC found Tetra Pak Group violated the AML for abusing its dominant market position in three segments of the aseptic carton package market and issued a fine of about US$97 million after a four-year investigation. In the Tetra Pak case, SAIC for the first time employed Article 17(7) of the AML—a catch-up provision to prohibit the abuse of market dominance—by determining Tetra Pak's illegal loyalty discounts as "other abusive conduct" under such provision.
For 2017, more cases involving loyalty discounts may be investigated and penalized. Undertakings need to review their discount systems and determine whether there are retroactive sales discounts and customized discounts. Further, undertakings must assess whether such discounts lead to anti-competitive effects by inducing customers to purchase a fixed amount or portion of products. If an undertaking expects to maintain such loyalty discounts, it should be able to justify the rationale.
Chinese courts have become more accustomed to SEP and antitrust suits
Since the landmark abuse of dominance case in 2011, Huawei Technologies v. InterDigital, courts in China have accepted roughly 80 lawsuits related to patent infringement and antitrust issues, two areas of law which have increasingly overlapped.
Several types of standard essential patents (SEP) lawsuits have been adjudicated in China. Patent holders are plaintiffs in most of the cases, including patent infringement suits in which the patentee seeks an injunction and damages against the misusers.
An ongoing case involving an SEP is Qualcomm’s ongoing suit against Meizu, in which the US software firm is asking the court to rule that the terms of the licensing agreement it offered to Meizu complied with the AML and Qualcomm’s fair, reasonable and non-discriminatory (FRAND) licensing obligations.
2016 was an active year for competition law enforcement and guidance. Key guidance was issued by the Competition Bureau (Bureau), Canada’s antitrust enforcement agency, regarding its approach to key tech and IP issues, such as patent settlements and standards essential patents, in the Bureau’s revised Intellectual Property Enforcement Guidelines. Furthermore, courts weighed in on long-running doctrinal debates, including whether the discoverability principle applies to private causes of action for damages under the Competition Act, whether umbrella purchasers (who purchase products from non-cartel members) can sue cartel members, and the Competition Tribunal broadened Canada’s approach to what constitutes an abuse of dominance provisions.
For mergers and cartels, the Bureau’s most significant enforcement areas, two high-profile, cross-border mergers were abandoned because of enforcement proceedings in the US, even though in one case (Superior Plus-Canexus), the Bureau cleared the merger on the basis of efficiencies. The Bureau extracted remedies in several other mergers, including in Parkland-Pioneer, which had been the subject of an interlocutory injunction. The Bureau continued to focus on concentration in the gasoline station industry. In addition to Parkland-Pioneer, two other transactions concerning gas stations were subject to remedies. Concerning cartels, the Bureau continued to lay changes and extract guilty pleas from participants in the Québec construction industry and the auto parts industry.
Legislation and enforcement guidance
There were no significant legislative amendments in 2016. In late September, however, the Liberal government introduced Bill C-25, which, when passed, will amend the affiliation rules in the Competition Act (Act) to treat partnerships, trusts, sole proprietorships, and non-incorporated business entities similarly to the manner in which corporations are currently treated. These amendments were considered under the previous Conservative government alongside more controversial reforms that would have authorized the Commissioner of Competition (Commissioner) to investigate and report on price gaps between products in the US and Canada. That bill died on the order table when the federal election was called in August 2015, but Bill C-25 is expected to be passed in early 2017.
As noted above, the Bureau also released new Enforcement Guidelines regarding Intellectual Property (IPEGs). The new IPEGs replace previous guidelines that dated back to 2000. As was the case under the previous IPEGs, the Bureau will continue to apply the general provisions of the Act to conduct amounting to “something more” than the mere exercise of intellectual property rights. The revised IPEGs also offer significant new guidance regarding the Bureau’s enforcement approach to product switching, patent assertion entities (or “patent trolls”), patent settlements, and standard essential patents.
2016 was an active year for mergers in Canada, with several high-profile transactions cleared without remedies, including Shaw Communications’ acquisition of WIND; Lowe’s acquisition of RONA on the basis of effective remaining competition from other home improvement retailers in locations of overlap; AB InBev’s acquisition of SABMiller and the divestiture of some of SABMiller brands to Molson Coors on the basis of global divestures; and Hydro One’s acquisition of Great Lakes Power Transmission on the basis that the parties’ transmission assets serviced different customers.
Following the abandonment of Staples’ proposed acquisition of Office Depot after the FTC obtained an interim injunction prohibiting closing, the Bureau withdrew its challenge of the transaction before the Tribunal. The Bureau also cleared Superior Plus Corp.’s proposed acquisition of Canexus Corporation on the basis of efficiencies, notwithstanding a challenge by the FTC in the US on the basis that it would reduce competition in North America regarding sodium chlorate and the subsequent abandonment of the transaction by the parties.
The Bureau resolved its ongoing challenge to Parkland’s acquisition of Pioneer Energy through a mediated consent agreement that saw Parkland agree to divest itself of gas stations in six local markets in Ontario and Manitoba. The Bureau also obtained remedies in numerous mergers, including from Iron Mountain regarding its acquisition of Recall, requiring Iron Mountain to divest records management assets in six cities and from Couche-Tard regarding its acquisition of gas stations from Imperial Oil, requiring Couche-Tard to divest itself of two gas stations.
Concerning cartels, 2016 saw further guilty pleas related to the Québec construction industry, with Chalifoux Sani Laurentides Inc. being fined CA$118,000 (with charges against its owner stayed) related to bid-rigging for sewer services, as well as Les Entreprises de ventilation Climasol Inc. fined CA$130,000 and its president CA$10,000 related to bid-rigging for a private ventilation contract.
The ongoing auto parts investigation is ongoing with Shinowa Corporation being fined CA$13 million by the Ontario Superior Court of Justice for bid-rigging related to electronic power steering gears. Nishikawa Rubber Co., Ltd., on the other hand, pled guilty and was fined US$130 million in the US related to sales in both Canada and the US, which the Bureau noted resulted from “unprecedented cooperation” with the Antitrust Division of the US Department of Justice.
In April 2016, the Tribunal found that the Toronto Real Estate Board (TREB) had engaged in abuse of dominance by restricting access to, and use of proprietary Multiple Listing Service data, adversely affecting innovation, quality and range of real estate brokerage services in Toronto. In so doing, the Tribunal ruled that although the dominant trade association did not itself compete in the adversely affected market (in this case, real estate brokerage services in Toronto), it had a “plausible competitive interest” in it in protecting some of its members from new entrants. The Tribunal decision is currently under appeal before the Federal Court of Appeal.
The Bureau followed up on its victory against TREB by launching an application against the Vancouver Airport Authority for restricting access for the supply of in-flight catering at Vancouver International Airport, another market in which the alleged dominant firm did not compete.
In 2016, the Bureau closed its investigation into Google’s online search services and its investigation into TMX Group Limited’s restrictions on market data.
In 2015, the Ontario Court of Appeal ruled in Fanshawe College of Applied Arts and Technology v. AU Optronics Corporation that the “discoverability” principle applied to private actions for damages based on the breach of the cartel conspiracy provisions of the Act. The discovery principle is a common law rule which provides that a limitation period begins to run not necessarily from the defendant’s conduct but from when “the material facts on which [the claim] is based have been discovered or ought to have been discovered by the plaintiff by the exercise of reasonable diligence.” The appellate decision, which arose in the context of the LCD panel class action, has the potential to provide plaintiffs with more time in which to bring claims in cartel class actions.
In the same case, the court also ruled that the statutory cause of action in the Act did not foreclose the ability of the plaintiff to claim damages pursuant to tort law.
In certifying the cathode ray tube class action in Fanshawe College of Applied Arts and Technology v. Hitachi, Ltd., the Ontario Superior Court of Justice held that “umbrella” purchasers (who purchased alleged cartelized products from non-defendants) had valid causes of action against the named defendants pursuant to restitutionary law.
Although competition has been a public policy issue for more than 20 years in Mexico, the enactment of the new Economic Competition Law in 2014 invigorated the Federal Economic Competition Commission (COFECE) with new authority (including the fact that it became an autonomous agency) and breadth of activity. Since the 2014 reform, COFECE no longer has jurisdiction in the telecommunications and broadcasting industries, which are now under the purview of the Federal Institute of Telecommunications. COFECE has focused its resources on a number of other industries that impact consumers in the Mexican market, and where antitrust oversight is deemed necessary (such as food supply, drug pharmaceuticals, transportation, among others). Since 2014, COFECE investigations and sanctions have grown significantly. From January to September 2016, COFECE economic sanctions reached around US$30 million; this amount is expected to grow in 2017. Furthermore, Mexico has moved up in the World Economic Forum’s ranking of effectiveness of competition policy from 114th in 2013 to 58th in 2016, with estimated benefits to consumers in the order of US$115 million.
Like other jurisdictions, anticompetitive conduct in Mexico is defined as either absolute monopolistic practices (per se) or relative monopolistic practices (rule of reason). These practices can be sanctioned by imposing economic fines and criminal penalties on perpetrators of anticompetitive behavior. Furthermore, COFECE has the authority to investigate barriers to competition in relevant markets by imposing actions to promote effective competition (e.g. ordering the divestiture of assets or stock ownership among market participants).
Also, COFECE’s leniency program is expected to grow through 2017. Since its implementation in 2006, the leniency program has permitted leniency applicants to avoid criminal sanctions and to receive substantially lower economic fines while also being an effective tool to detect cartel behavior in a number of Mexican industries.
As part of the 2014 sweeping reform of the energy sector—a main driver of the Mexican economy—private companies were allowed to participate in the entire value chain of the energy sector and state-owned, vertically-integrated monopolies in both the oil and gas, and power sectors were eliminated. Since then, COFECE has been playing a vital role in deregulating the market to ensure that effective competition conditions are in place. COFECE has issued several opinions regarding the procedure for divestiture of assets and setting the ground rules (including asymmetric regulation) relating to the assets and market share of Mexico’s largest state-owned energy company, Petróleos Mexicanos (Pemex). Furthermore, COFECE has sanctioned Pemex for anticompetitive conduct, including relative monopolistic practices, such as tie-in arrangements. As such, COFECE is expected to continue to play an important role in deregulating and divesting Pemex, thereby providing opportunities for private sector participation through 2017.
Additionally, the Mexican Government has begun the liberalization of gasoline and diesel pricing to end-consumers, which is expected to be completed by the end of the year. COFECE—along with the Ministry of Finance and Public Credit, and the Energy Regulatory Commission—will monitor this process to prevent Pemex or private companies from engaging in anticompetitive conduct. Special attention will be given to price fixing and market allocation, along with mergers between market competitors. Further, COFECE has already issued opinions to local governments to eliminate restrictions on the establishment and operation of service stations to promote much-needed competition in the sector. Because of the current public outcry regarding gasoline prices, it is expected that COFECE will closely scrutinize the sector to ensure effective competition through 2017.
Cartel-like horizontal agreements under scrutiny
In 2016, COFECE commenced investigations and prosecution of cartel conduct in several sectors of the Mexican economy. These include: recent investigations of barriers to competition in the ports of Puerto Progreso; sanctions against firms in the maritime passenger transportation sector in the state of Quintana Roo; and investigation of the production, distribution, and marketing markets of pharmaceutical drugs in Mexico. These investigations and prosecutions will likely increase in Mexico, with a special focus on cartels that have already been penalized in other jurisdictions and directly affect the Mexican economy. In addition, bid-rigging in government procurement will likely be a focus for enforcement in 2017.