It’s Up to You: Companies Must Ensure EU State Aid Is Legal
If a company receives illegal State aid from an EU government or public entity, then it is at risk of being required to repay the value of that aid plus interest. State aid is any financial benefit that is not provided on terms equivalent to those a private company would have used, and it will be illegal unless it is exempted. A benefit arises not only from direct grants of cash, but also, for example, from low-interest loans, certain public-sector guarantees and sales of land below market value (to name just a few).
A 5 March 2019 judgment of the EU’s top court, the European Court of Justice (ECJ), confirms that it is up to the recipient of State aid to confirm that the aid is legal. The recipient does not benefit from a legitimate expectation that, since a public body is providing aid, it is legal and therefore not subject to a potential recovery order.
The case concerned rules under which some types of aid are exempted automatically and do not need to be reported to the European Commission in Brussels for a specific exemption. The court held that national authorities are in the same position as the recipient; where an automatic exemption is relied on, both the donor and recipient must ensure that the aid is provided within the bounds of that exemption. If this is not the case, the recipient cannot seek to avoid recovery of the aid based on its assumption that the donor had applied the rules correctly.
This issue is important due to the extent of aid provided in the EU and the assumption of many recipients that if a government or public body confirms that the aid is legal then it will be legal. A recipient must check the analysis itself.
UK Cover-Bidding Fines Show Enforcement in Small Local Markets
On 1 March 2019, the UK Competition and Markets Authority (CMA) announced that five office fit-out companies had agreed to pay total fines of £7 million for colluding on prices. The companies are all based in the London area and were engaged in relatively small projects.
Each company admitted to breaking competition law over the period 2006-2017 by “cover bidding” in competitive tenders. This involves companies agreeing with each other to place bids that are deliberately intended to lose the contract. Such behaviour is a type of cartel activity.
Two of the companies admitted to cover bidding on just one occasion, but were nevertheless fined. Both are now likely, with the other cartelists, to be the subject of follow-on private damages claims from customers.
One of the participants brought the cartel to the CMA’s attention under the leniency rules and, as a result, that company was not fined. All of the fined companies received a 20 percent discount for admitting the infringements, and one received a further 25 percent discount for providing information about its participation.
The case shows once again that the CMA will investigate relatively small and local cartels in the UK. It also shows the benefits of using the CMA’s leniency programme.
Companies of any size active in the UK (or EU) must have a suitable competition compliance programme in place. These programmes help prevent competition law infringements and may also identify infringements, thus allowing a company potentially to take advantage of leniency programmes and therefore protect itself from regulatory fines.
New Whistleblowing Rules in the EU
On 12 March 2019, the European Parliament and the EU Member States agreed (subject to formal approval) on new EU-wide standards to protect whistleblowers. The rules apply to reporting on breaches of EU law in a range of fields.
Coverage under the rules extends to areas including money laundering, corporate taxation, data protection, food and product safety, environmental protection and antitrust/competition law. Member States are, however, free to extend the scope of the rules and the European Commission has encouraged them to establish comprehensive frameworks for whistleblower protection.
The main elements of the new rules are requirements for reporting procedures and related obligations for employers, the introduction of safe reporting channels, and provisions preventing retaliation and ensuring effective protection of whistleblowers.
There was concern in the competition law community about an earlier draft of the rules, which had required whistleblowers first to report concerns within their company. This was removed and, although whistleblowers are encouraged first to report internally, they may also report directly to the competent authorities as they see fit.
Companies need to be aware of these rules and incorporate the requirements into compliance programmes and internal procedures. This is advisable even before formal implementation of the rules so as to show the use of best practice.
UK CMA Provides Practical Example of Enforcement of Rules on Abusive Discounts
On 14 March 2019, the UK CMA provided an example of the practical application of the EU and UK competition law rules on abusive discounts offered by dominant companies to their customers. The decision is valuable as a structure for analysis for dominant companies, their customers and third parties affected by discounting.
Merck Sharp & Dohme (MSD) manufactures an infliximab product called Remicade. This is a drug used to treat chronic illnesses such as Crohn’s disease and rheumatoid arthritis.
After its patent for Remicade expired in early 2015, MSD introduced a discount scheme in an attempt to ensure the UK National Health Service (NHS) would continue to use mostly Remicade, rather than competitors’ newer and cheaper versions (biosimilars) of infliximab. MSD linked the level of discount offered on Remicade to the total amount of the drug purchased. This approach, when coupled with caution in the NHS over moving away from tried and tested drugs, was designed to dissuade the NHS from trialling biosimilars, regardless of the potential savings.
The CMA found that MSD has a dominant market position and that its discount scheme for Remicade was designed to delay or reduce competition from other suppliers of infliximab. These were loyalty-inducing discounts of the type which would normally infringe competition law. Further, the scheme was not objectively necessary and there was no efficiency justification.
However, the CMA went beyond this analysis to consider whether the anti-competitive effect of the arrangement was more than purely hypothetical. Was an anti-competitive effect “likely” in practice?
The CMA concluded that this was not the case. On the basis of the market conditions at the time the scheme was introduced, the financial incentive to purchase from MSD created by the scheme was likely to be overcome in those regions of the UK where clinical caution was lower than MSD had expected, and/or where a longer-term view of the costs and benefits of biosimilars was taken, and was less strong than MSD had originally assumed.
Nevertheless, the case provides a warning to dominant companies and shows a potential route to challenge for third parties. A business which designs a discount scheme to protect its dominant market position risks breaching EU and UK competition law. Had MSD’s scheme in practice been likely to prevent or limit competition from rivals, the company could have faced severe financial penalties and likely follow-on damages claims from third parties.
Additional European competition law news coverage can be found in our news section.