Competition authorities are encouraging competitive businesses to “cooperate” to benefit economies and the public interest during the COVID-19 pandemic, but also warn they will be scrutinising companies for signs of anti-competitive price-fixing and collusion. Samantha Gilbert investigates why compliance professionals should use common sense and strong objective justification criteria to ensure lawful cooperation and activity.
Lockdown and travel restrictions during COVID-19 have disrupted global supply chains, causing a shortage of raw materials, delayed freight shipments, and reduced access to labour. Faced with economic uncertainty and diminished profits, some business leaders may seek cooperation agreements with competitors to help maintain operations through the pandemic.
As a result of the current unprecedented circumstances, competition authorities around the world are confirming they will “relax” enforcement against companies who are trying to cooperate to benefit the economy and general public.
The UK’s Competition and Markets Authority (CMA) has stated that it will not enforce competition rules against “necessary cooperation between businesses to deal with the current crisis and ensure security of supplies of essential products and services.” South Africa’s Competition Commission has approved a block exemption to allow the private healthcare system to “cooperate on ensuring that there is adequate capacity and stocks at healthcare facilities throughout the country in order to respond to the COVID-19 national disaster.” Regulations have also been approved to “assist in ensuring that the private and public healthcare system can provide the necessary care to citizens without fear of falling foul of the Competition Act,” according to a statement from the SA authority. In the US, the Federal Trade Commission and Department of Justice issued a statement acknowledging “the unprecedented cooperation between federal, state and local governments and among private businesses required to address the spread of COVID-19”, says Maureen Ohlhausen, global antitrust and competition practice chair at Baker Botts LLP in Washington.
Businesses may need to temporarily combine production, distribution, or service networks to facilitate production and distribution of COVID-19-related supplies, and the US authorities are aiming for seven-day responses to COVID-19-related requests regarding cooperation. “Regulators are being very helpful”, says Bhavisha Mistry, general counsel and company secretary at global pharmaceutical company Mawdsley’s, in supporting compliance, and “giving that assurance that they’ll take a slightly more lenient approach when it comes to enforcing compliance.”
While competition authorities are being more lenient in light of the current crisis, they are also placing extra scrutiny on price-fixing and potential price-gouging of essential items and collusion. In the US for example, President Trump authorised an update to the Defense Production Act 1950 to include ventilators, face masks, gloves and other items as “scarce materials” to prevent anyone from accumulating the designated materials in “excess of the reasonable demands of business, personal, or home consumption,” or accumulating them “for the purpose of resale at prices in excess of prevailing market prices.” In the UK, the CMA has launched a taskforce specifically to tackle anti-competitive practices related to the pandemic, including charging excessive prices or making misleading claims about products.
For compliance teams, these actions suggest that while regulators are trying to support businesses in these unprecedented times, any hint of anti-competitive practices will still be reprimanded. And they are right to be vigilant according to Simon Barnes, partner at Shoosmiths LLP with experience providing counsel on competition law risk management, who says “times of crisis can significantly increase competition law compliance risks for businesses. History suggests that many cartels have been born out of competitors seeking to address difficult economic times through collusion.” The CMA established the taskforce to be kept “appropriately up to speed and involved” with the fast-paced developments relating to COVID-19, Barnes says, and equally “all businesses need to remain on the ball regarding how they manage current challenges, to avoid exposing themselves to competition law risk.”
Compliance officers should, therefore, be focusing on helping their companies navigate the very narrow path of healthy cooperation. In a climate where “the advice is changing on a daily or weekly basis”, Mistry says, it is going to be a challenge to find the balance where a company is seen to be playing their part within the industry, while also avoiding cooperation sliding into collusion.
Responding to increased scrutiny
Competition authorities around the world will be scrutinising market developments because they are concerned that “the unprecedented and rapidly evolving crisis might lead to businesses exploiting the situation,” says Barnes.
Companies in certain industries may also be more likely to face particular scrutiny from authorities during the pandemic, according to Matthew Levitt, antitrust and competition partner at Baker Botts LLP in Brussels. This will include companies active in industries “experiencing heightened demand or restricted supply”, such as sanitary or food production, distribution and retail, and industries “facing a sudden and precipitous fall in demand and/or prices and which, based on experience following the financial crisis, may be tempted to coordinate capacity reductions or pricing,” says Levitt.
The transient developments and advice surrounding COVID-19 “are likely to create significant opportunities for individuals to get it wrong with regard to competition law, possibly wholly unintentionally and with the best of intentions,” says Barnes. To mitigate risks, therefore, it is crucial, that “staff continue to understand and respect the need for competition law compliance” to avoid a mistake as simple as providing a competitor with advice on how they are managing the commercial challenges of COVID-19 over a phone call. Compliance teams should provide remote refresher training for all exposed staff over the coming weeks to guard against mistakes. “The mantra for staff should be that competition law applies in the usual way and that they should contact the legal team before doing anything that they would not ordinarily feel comfortable doing,” Barnes adds.
Implementing an “objectively justifiable criteria” will help protect a supplier against the risks of facing enforcement actions, because companies will have evidence to provide to a regulator that their intentions were in the interest of maintaining supply, Levitt says. For any pricing increases, compliance teams should focus on how their business can objectively justify the rise in economic terms. For example, if the cost of production has increased, this could justify a commensurate price increase, says Levitt. During COVID-19, perhaps a food product becomes more expensive to produce because raw materials become scarce or more challenging to import, so this would be a viable reason to increase the price.
Ultimately, the key areas where businesses should be reviewing and assessing the risks associated with their conduct in relation to the current stance taken by regulators, according to Barnes, includes:
• contact and cooperation with competitors;
• discussions with customers regarding how, to whom, or on what terms they will supply;
• managing changes to selective distribution systems; and
• any conduct by potentially dominant businesses that might risk being regarded as exploitative or exclusionary.
Where businesses are seeking to justify their conduct based on COVID-19-related issues, compliance should ensure that their approach is for justifiable reasons and that this is properly recorded, in case a regulator were ever to challenge their conduct on competition law grounds.
Distinguishing cooperation from collusion
In line with guidance from numerous local authorities, including the CMA, competitive business are encouraged to “cooperate” while maintaining good competition. However, discerning where cooperation ends and collusion begins in a pandemic, where guidance and circumstances can change daily, presents compliance officers with a complex challenge, says Mistry, so “counsel have got to be careful about how they are advising their company.”
As a general counsel, Mistry says, people in her position are “used to detailed regulation, guidance and case law to help guide them on what advice to give” but for COVID-19 competition issues, GCs are having to interpret brief policy notes and letters which simply state that regulators are going to be more “relaxed”. The rapidly evolving environment of COVID-19 means that there is not enough time to update legislation and guidance notes, as would be the norm, so counsel have to effectively balance the weight of competition law against “a simple letter” from a regulator.
The best way to protect companies against competitive risks during novel situations like COVID-19, therefore, is to ensure companies can justify their actions, which depends ultimately on common sense, individual experience and pragmatism, Mistry says. In-house counsel should work through the pandemic in a way that if they are questioned on an action, they will be able to demonstrate that they have followed guidance from regulators. “Competition law is all about protecting consumers, so if you’re working together with a competitor to try and help that consumer, then that shifts the balance more and it means that what you’re doing is in the public interest as opposed to trying to get a competitive advantage,” she says.
Once the decision has been made to cooperate, Livett emphasises that compliance teams must be mindful of the volume of information which is being shared. He advises limiting the exchange of information to “what is necessary to serving the public interest.” The lower the volume of information shared, the lower the risk. Richard Eccles, a partner advising on competition law (EU and UK) at Bird & Bird, goes as far as to say that no companies should co-ordinate on the terms on which they will provide assistance; this information should be kept strictly confidential.
In essence, to navigate their businesses through these stormy waters, compliance teams must rely on their common sense and ensure that they implement robust, objective justification criteria to ensure that any cooperation is justified and sound. This will assure any regulators that the company is only taking action which is, as Eccles says, “strictly proportionate to what is needed to provide solutions to the current crisis.”
Lexology PRO Compliance is including articles relating to covid-19 in the main Lexology newsfeed in order to provide in-house counsel users with practical information and first-hand experiences on how to navigate the current market.
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