After nearly 10 months since public deliberations,(1) on April 21 2017 the Federal Court published the long-awaited reasoning of its June 28 2016 judgment. The judgment deals with the core principles of the competition law assessment of licence and distribution agreements. It is a paramount judgment with significant implications, given that it changes the practice and tightens the competition law assessment of licence and distribution agreements.
The judgment deals with a 2009 Competition Commission (ComCo) decision regarding a production and distribution licence agreement between Swiss company Gaba and Austrian company Gebro for the production and distribution of Elmex toothpaste. ComCo concluded that the licence agreement prohibited Gebro from exporting products out of Austria and, in particular, from exporting them into Switzerland. This qualified as a restriction of parallel imports into Switzerland (absolute territorial protection with a prohibition of passive sales) and ComCo issued a fine of Sfr4.8 million (approximately $4.9 million). ComCo's decision was confirmed in a 2013 Federal Administrative Court judgment. Contrary to Federal Supreme Court practice, in its 2013 judgment the Federal Administrative Court declared for the first time that the mere qualification as a hardcore restriction was sufficient to establish a significant restriction of competition.
The Federal Court has confirmed the prior instances and has indicated that all price, quantity, customer and territory agreements between competitors, as well as resale prices and territorial protection clauses in distribution agreements, can potentially be fined irrespective of their actual effects or implementation (unless they can be justified based on economic efficiencies). This is a departure from previous practice.
The Cartel Act is applicable to behaviour that has an effect in Switzerland, even if the behaviour occurs abroad. In the Federal Court's view, the effects in Switzerland do not need to have any specific intensity and therefore it is sufficient if behaviour outside Switzerland "has an effect in Switzerland or could have an effect". Any additional appreciability or foreseeability is unnecessary. In the case at hand, exports into other countries from the contractual territory (in this case Austria) were prohibited and this was considered a prohibition of direct or indirect imports into Switzerland. This was considered sufficient for a potential effect on the Swiss market.
The consequences of a broad effects-based approach cannot be underestimated. On a global level all licence and distribution agreements could fall within ComCo's jurisdiction if such agreements could have an effect in Switzerland in any way (even only minimally, hypothetically or indirectly). Therefore, any agreements without a direct link to Switzerland would also have to be in line with the rules of the act if a hypothetical effect (eg, an indirect delivery into Switzerland) cannot be excluded. In past cases the authority considered, for example, that distribution agreements in the United States which restrict distribution to the US territory would fall within the scope of application of the Cartel Act.(2)
The main point of the judgment concerns the interpretation of the Cartel Act's condition of a significant restriction of competition. According to prior practice, a significant restriction of competition would always have to fulfil certain quantitative criteria (ie, have some kind of effect on the market). The Federal Court has now concluded that all agreements that fall within the categories of Article 5(3) and (4) of the act (eg, agreements on prices, quantities, customers and territories between competitors, as well as agreements on resale prices and territorial protection in distribution agreements) must always be considered a significant restriction of competition, irrespective of their actual effects.
In addition, the court stated that the criterion of a significant restriction should be seen as a de minimis rule which should disburden the authority and allow the elimination of irrelevant cases. However, a small amount of quantitative significance should already be sufficient: if the qualitative element (the type of agreement) is substantial, there is only a marginal need for a quantitative element. The agreements indicated in Article 5(3) and (4), which are considered particularly problematic, are generally to be considered as a significant restriction.
The Federal Court's judgment departs from previous practice, which leads to a more restrictive application of the act. It is now irrelevant if and to what extent a behaviour has any effects on competition. Also, a behaviour which does not restrict competition, but could only hypothetically restrict competition, could therefore be penalised. There is remaining uncertainty regarding the de minimis rule and its application to agreements according to Article 5(3) and (4). The expected clarification has not been made.
Agreements must restrict competition in a specific market to fulfil the conditions of Article 5(1) of the Cartel Act. The Federal Court concluded that an actual manifestation of a restriction is not necessary and that a potential restriction would be sufficient. Therefore, agreements which have no actual effects or have not even been implemented could potentially restrict competition and would thus fulfil the criteria of Article 5(1).
This has significant and unforeseen consequences. Even agreements which have never been implemented or which are understood differently (negatively) by the competition authority through how they have been applied in practice could be penalised. The risk of a penalty exists – even if a company in a specific case acted correctly and in compliance with the law – if an agreement or communication (not applied or not implemented) is considered to be potentially problematic by ComCo.
The relevant fact of Gaba/Gebro concerned a licence for the production and distribution of certain products in Austria. However, only distribution agreements are mentioned in the wording of Article 5(4) of the act with regard to territorial penalties. According to the Federal Court, Swiss competition rules regarding distribution agreements should be equal, equally restrictive and not more restrictive than EU rules, because the legislature intended to achieve materially identical regulation. The Federal Court considers that the term 'distribution agreements' should be understood in a broad manner and that clauses in other agreements (eg, franchise or licence agreements) would also fall within this scope. However, the Federal Court has also indicated that it is nevertheless impossible to apply in parallel the corresponding EU rules with regard to technology transfer agreements.
The inclusion of licence agreement goes beyond the wording of the law in Article 5(4) and therefore significantly extends the scope of application for cartel penalties. Technology transfer agreements will therefore always risk falling within the hardcore restrictions of Article 5(4), even if certain territorial restrictions are treated differently under EU competition law. From a competition law perspective, this results in a disadvantageous position for Swiss licensors compared to EU companies.
Finally, the Federal Court confirmed that fines based on Article 49a of the Cartel Act have a character similar to criminal fines and therefore, for example, the European Convention on Human Rights is also applicable. Before the judgment it was unclear whether the wording of Article 49a(1) allowed a fine, even if the legal presumptions in Article 5(3) and (4) have been rebutted. According to the court, the wording of Article 49a is unclear, but it was the intention of the legislature to issue fines for all such cases, even if the legal presumption has been rebutted. Further, the court confirmed that an infringement of the Cartel Act must be attributable on a subjective level, and to that effect there must be an infringement of the objective diligence obligation. According to the court, such an obligation is generally infringed if an anti-competitive behaviour has been shown, because companies must know the rules of the Cartel Act and the respective practice and publications of ComCo.
The Federal Court's Gaba judgment leads to a significant tightening of the application of the Cartel Act. Even a behaviour which has not been implemented, has been applied differently or not even restricted competition can be subject to a competition law fine.
Together with the virtually borderless international application of the Cartel Act and the lack of clarity regarding a possible de minimis rule, this leads to a need for action with particular regard to international licence and distribution agreements, which could potentially have an effect in Switzerland.
With this decision, the authority has received new possibilities to act against parallel import restrictions and it remains to be seen how they will use their new powers.
For further information on this topic please contact David Mamane at Schellenberg Wittmer by telephone (+41 44 215 5252) or email (firstname.lastname@example.org). The Schellenberg Wittmer website can be accessed at www.swlegal.ch.
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(1) For further details please see "Landmark decision: stricter rules for licence and distribution agreements".
(2) For further details please see "International distribution systems under fire".