After the US Department of Justice’s victory in its first-ever arbitration of an antitrust matter, Hogan Lovells partners Meghan Rissmiller, Thomas Kendra and Christian Ritz ask if arbitration represents the way forward in competition law.
On 9 March, the US Department of Justice Antitrust Division announced its win in an arbitration over market definition related to the merger of aluminum manufacturers Novelis and Aleris. This case marks the first – but likely not last – time that arbitration has been used by the Antitrust Division to resolve a dispute. Given the DOJ’s expressed enthusiasm for the “flexible and efficient” arbitration mechanism, and Assistant Attorney General Makan Delrahim’s characterisation of arbitration as a potential “model for future enforcement actions”, we expect the Division to continue to use arbitration to resolve future antitrust disputes.
We take this opportunity to consider Novelis and its impact on the arbitrability of future antitrust disputes in the United States and compare the circumstances in that case with the use of arbitration in antitrust disputes under European Union competition law. While arbitration has traditionally played a marginal role in antitrust enforcement, Novelis and the European experience show that arbitration can nevertheless serve as an important support to antitrust enforcement. Indeed, it may even play a more significant role in competition law disputes in the future.
The background to the Novelis dispute
Novelis originated in a civil antitrust lawsuit that the DOJ filed in September 2019 in the US District Court for the Northern District of Ohio, seeking to challenge Novelis’s proposed acquisition of Aleris. The lawsuit alleged the acquisition would combine two of only four North American producers of aluminum auto body sheet (ABS), leading to the concentration of approximately “60 percent of total production capacity and the majority of uncommitted (open) capacity with Novelis.”
Prior to filing the complaint, the DOJ agreed with the parties to pursue binding arbitration “if the parties were unable to resolve the United States’ competitive concerns with the defendants’ transaction within a certain period of time.” The Antitrust Division can arbitrate disputes pursuant to the Administrative Dispute Resolution (ADR) Act of 1996 and the Antitrust Division’s implementing regulations. The implementing regulations provide specific guidance on the appropriate use of binding arbitration and allow for ADR to be used in merger reviews.
Under the arbitration agreement, the district court supervised fact discovery, after which the case was referred to arbitration to resolve the limited issue of product market definition. The DOJ argued the relevant product market should only include aluminum ABS, while Novelis and Aleris argued it should be broader to include steel ABS. As specified in the arbitration agreement, the district court entered a hold separate stipulation and order requiring Novelis to hold separate the business to be divested. The parties were permitted to close the rest of the transaction.
Following a ten-day arbitration, the arbitrator found in favor of the Antitrust Division, holding that aluminum ABS constitutes a relevant product market. As a result of the arbitration decision, Novelis must divest Aleris’s North American aluminum ABS operations. The company must also reimburse the DOJ for costs associated with the arbitration.
Following the DOJ’s victory, Delrahim touted the use of arbitration in this case, stating that “this first-of-its-kind arbitration proved to be an effective procedure for the streamlined adjudication of a dispositive issue in a merger challenge. As demonstrated in this case, arbitration has the potential to be a powerful dispute resolution tool in the right circumstances … ”
This brings into question the extent to which arbitration is or could be used as a competition law dispute resolution mechanism in other jurisdictions, notably in the EU.
The European perspective
The relationship between European competition law and European courts or outside tribunals for merger enforcement is somewhat different than that in the US, raising an interesting parallel between the Antitrust Division’s use of arbitration in Novelis and how the European Commission or national competition authorities in EU member states could use arbitration to settle disputes arising from or in the context of EU competition law enforcement.
Under EU competition law, while the Commission constructs European competition rules and monitors the proper application of these rules, it cannot refer cases to enforcement bodies (national courts or the Court of Justice of the European Union (CJEU)), nor to an arbitral tribunal. Rather, its own decisions resulting from its investigations are themselves binding, although such decisions may be appealed to the General Court of the EU, whose decisions might be appealed once more to the CJEU.
By contrast, to enforce a transaction in the US – either to seek to block a transaction via preliminary injunction or to finalize a consent decree under the Tunney Act procedure – the Antitrust Division must file an action in US federal court. Thus, a tribunal is always involved in US antitrust enforcement. However, although authorised by DOJ regulations in 1996, the use of arbitration in Novelis to resolve a central part of the dispute between the DOJ and the parties related to enforcement is novel.
In the context of proceedings under European competition law, however, a case may not be referred to an arbitral tribunal by either the Commission or one of the parties involved for any part of enforcement, which aligns with the EU’s rule against referring cases to enforcement bodies. Indeed, this has a certain logical sense due to the inherent consensual and generally confidential nature of arbitral proceedings. An arbitration decision only has binding effect on the parties to the arbitration, so as a procedure it does not generally lend itself to enforcement procedures by public bodies.
Nevertheless, although it has not and so far cannot be used as part of the Commission’s enforcement decisions, arbitration already plays an important role in European competition law, most notably in the following two ways as set out in more detail below: as an enforcement mechanism for commitments in merger clearance procedures; and as a public policy consideration in international arbitration disputes.
Enforcing commitments in merger clearance procedures
The first role of arbitration in European competition law is in the implementation of Commission merger clearance decisions. For over 30 years, the Commission has given arbitral tribunals jurisdiction to review commitments undertaken by parties in merger approval processes. In other words, although a decision of the Commission cannot be enforced through arbitration, an agreed-upon commitment can be. And, on occasion, it is.
For example, in Elf’s 1992 acquisition of Minol, one of the commitments the Commission extracted as a condition of approval was for Elf, an oil company, to extend a legally binding offer to its competitors for use of the depot facilities of Minol, the former East German state-owned petroleum distribution network, post-close. The Commission’s remedy ensured Elf’s rivals, reliant on Minol’s network, continued to have access to throughput rights and supplies from Minol’s depots on commercially acceptable terms. The Commission stated that: “Arbitration by mutually agreed independent experts will be provided in case of disputes relating to the application of the agreement.” Mandating the use of arbitration to resolve disputes in Elf’s supply contracts with rivals achieved the Commission’s dual goals of preserving competition and avoiding ongoing monitoring of the remedy. The independent experts identified as part of the arbitration process would serve that role.
In the 2003 Newscorp/Telepiu transaction, arbitration served a similar role as in Elf/Minol – to provide a mechanism to monitor the implementation of the remedy. The Commission stated, “The submitted undertakings are to a large extent behavioural. An effective monitoring system is therefore crucial.” The commitments the parties made generally related to contracting with third parties for acquisition of TV channels, premium films, rights for national football club matches, and other worldwide sports events to preserve competition in the Italian pay-TV market. The parties had proposed a settlement resolution mechanism using both the Italian Communication Authority (ICA) and private arbitration to address disputes between the parties and third parties regarding commitments designed to preserve competition in affected markets. Notably, the agreement followed standard international arbitration procedure, making reference to the ICC Rules. In 2012, an ICC arbitral tribunal ruled on an arbitration case stemming directly from this decision, restricting the scope of the commitments undertaken by Newscorp further to its merger with Telepiu.
Arbitrating EU competition law disputes
The use of international arbitration in regard to competition law disputes goes further than just reviewing merger commitments. Following the widely acclaimed Eco Swiss decision by the European Court of Justice in 1999, it has long been settled that article 101 of the Treaty on the Functioning of the European Union (TFEU) on European competition law “constitutes a fundamental provision which is essential for the accomplishment of the tasks entrusted to the Community and, in particular, for the functioning of the internal market,” and therefore “may be regarded as a matter of public policy” for the purposes of international arbitration proceedings.
EU competition law as a “matter of public policy” in international arbitration
However, the CJEU in Eco Swiss also left open a number of questions – including whether arbitrators should always be obliged to assess competition law arguments even if not explicitly raised by the parties to the arbitration; and whether the mere rejection of competition law arguments in the oral hearing without a reflection of such assessment in the final award should be sufficient to avoid the EU public policy exception.
The Genentech case provided the CJEU with an opportunity to address these questions in 2016, but the court refrained from further clarifying the role and importance of competition law assessment in international arbitration. Although Advocate General Wathelet’s opinion followed a “maximalist” approach to the judicial review of national courts when it comes to the assessment of competition law arguments in arbitral awards – requesting a full review of competition law arguments even if a potential violation is not “flagrant” – the CJEU’s judgment remained silent on this question. It is not clear from the judgment why the CJEU has opted for silence on these general issues. However, it seems likely that this is due to them not being strictly linked to the questions subject to the referral for preliminary ruling, rather than the CJEU expressly avoiding further clarifying these issues.
Despite these remaining open questions, the fact that competition law constitutes public policy opens the door for international arbitral tribunals to decide matters on the basis of competition law. Just as national courts may review an arbitral award dealing with EU competition law on public policy grounds, a dispute involving two private parties relating to EU competition law may also be arbitrated.
It is therefore a relatively frequent occurrence that arbitral tribunals are called upon to apply competition law, and while most such decisions are confidential due to the nature of international arbitration, examples in the public domain include Labinal v Mors and Westland Aerospace or Jacquetin v Intercaves , where the arbitrability of competition law disputes was upheld by the French courts.
Arbitration agreements and arbitrability of competition law damages claims
While it can be said that the arbitrability of competition law is now widely accepted in the EU as well as the US, recent CJEU rulings, for example in CDC Hydrogen/Evonik Degussa, have sparked a debate as to how arbitration agreements must be drafted to cover competition law claims for damages based on a violation of European competition law rules, ie, article 101 or 102 TFEU. While article 101 constitutes the general prohibition of collusion between two or more undertakings, article 102 states that the abuse of a dominant market position by even just one undertaking through unilateral measures is prohibited as incompatible with the internal market. Although to date the CJEU has not specifically ruled on arbitration but rather on jurisdiction agreements, the reasoning can be equally deployed to understand the material scope of both jurisdiction and arbitration agreements.
In essence, the court had been asked in CDC Hydrogen Peroxide if a broadly drafted jurisdiction/arbitration clause would also extend to claims for damages arising from non-compliance with article 101 or 102 TFEU, or if it would be necessary to specifically include such claims in the clause. Interestingly, the CJEU did not develop a uniform concept but decided that specific reference was only needed where the claim is based on a violation of article 101 as claims based on article 102 tend to materialise in contractual relations. What seems clear from this position is that the court seems to be prepared to accept that claims relating to a contractual relationship might fall within the scope of a jurisdiction/arbitration clause, even though they may normally be regarded as tortious in nature. While the court seems to assume that this is typically not the case with article 101 claims, it acknowledges the fact that article 102 claims will often revolve around the question of whether one party abused its market power to dictate overly vexatious or oppressive contract terms, terms which will then form the centre of the dispute.
Yet, it is difficult to see why claims for damages based on a cartel violation under article 101 TFEU would be so materially different that they warrant an entirely different approach. In fact, cartel-related damages might as well be based on excessive prices that can be found nowhere but in the essential terms of a contractual agreement.
Remarkably, national courts have now started characterising tortious claims as contractual in nature so as to make them fit for arbitration (“contractual workaround”).
As in international dispute resolution, the proper characterisation of claims as contractual or non-contractual is just another highly complex and controversial endeavour, and the arbitration community should certainly prepare itself to hear from Luxembourg again soon.
The growing role of international arbitration in FRAND disputes
Finally, the growing importance of arbitration in cases revolving around the interface between intellectual property law and competition law marks another interesting interplay between EU competition law and international arbitration. This is due to the CJEU’s and the European Commission’s interpretation of article 102 TFEU which forces holders of standard essential patents to grant licences on fair, reasonable and non-discriminatory (FRAND) terms. However, the parties often cannot agree on what constitutes FRAND terms and turn to arbitration tribunals to resolve these issues. Hence, arbitration tribunals have to apply competition law.
The European Commission acknowledges this approach in its Samsung decision of 2014 by accepting within the final commitments arbitration in case of disagreement. Also, the CJEU in its Huawei judgment seems to regard arbitration as a feasible approach when referring to an “independent third party” in case the parties are not able to reach an agreement.
However, and as mentioned before, in these scenarios it still remains an open question if arbitration tribunals have to apply articles 101 and 102 TFEU even when the parties have not put forward competition law arguments.
Arbitration increasingly accepted
Despite the challenges of consent in regards to what are by nature public enforcement procedures, there clearly is a role for international arbitration and arbitration more generally in antitrust and competition law matters. Indeed, the DOJ’s use of arbitration in Novelis and the increasing acceptance of international arbitration to determine EU competition law issues demonstrate that arbitration can be a useful tool for regulators and private parties to settle their competition law disputes. As a result, it can be expected that the role of international arbitration in competition law disputes will continue to grow on both sides of the Atlantic.