The year in review and what to expect in 2014

Overview
Cartel enforcement
Continuing recourse to commitments
Rebates
Technology transfer
Merger control
Private damages initiative
Article 101 enforcement

Overview

In October 2014 Joaquin Almunia's term as European competition commissioner will come to an end. It is hard to identify a defining image of his legacy, but his five years in office have been characterised by pragmatic and sometimes bold enforcement.

Tough enforcement against cartels has resulted in some eye-watering fines and increased reliance on the settlement procedure, which lets cases close quickly and with a reduced risk of appeal in return for a 10% discount in the fine.

The increased use of commitments in abuse of dominance cases means more immediate results for consumers and fewer years lost in legal wrangling before the European courts.

Rigorous scrutiny of mergers has been another featureof Almunia's term, with a total of four prohibition decisions issued (compared with two during the term of his predecessor, Neelie Kroes). Although the commission has come under fire for the duration of pre-notification consultations, changes to alleviate the burden on deals that raise no substantive concerns which came into force in January 2014, are welcome (albeit that in some cases the burden to business will increase as a result).

With officials aiming to clear the decks as much as possible before a new commissioner is appointed, 2014 promises to be a busy final year:

• Decisions are expected in a number of major cartel and abuse of dominance cases;
• New rules on patent and know-how licences are set to enter into force;
• Amendments to merger rules to cover minority shareholdings require legislative changed that will not be pushed through until October 2014; and
• Some progress in legislation designed to facilitate private damages actions in Europe is likely, but claimants have not been deterred from seeking damages almost as a matter of course on the closure of any investigation into anti-competitive behaviour.

The commission's first major investigation into vertical relationships in 10 years was launched with a dawn raid at the end of 2013 and is set to rumble on over several years (Article 101). A new era in EU vertical enforcement may be heralded as authorities clamp down on allegations that suppliers are unduly restricting online sales and parallel trade, as well as engaging in resale price maintenance. More enforcement in the sphere of problematic information exchanges is likely and it is advisable to keep a close eye on an emerging trend of authorities objecting to price signalling practices without evidence of collusion among competitors.

The message for business is that Europe's continuing weak economic performance is no defence for letting compliance standards slip.

Cartel enforcement

2013 enforcement overview

Benchmarking schemes under scrutiny
The commission imposed nearly €1.9 billion in cartel fines during 2013 in just three cases. The lion's share of this amount (€1.7 billion) is accounted for by the fines imposed in the investigations into interbank lending rate manipulation. However, this is not the end of the story. The fines levied concerned only those banks willing to admit liability and settle in return for a reduction in the fine. The commission is set to continue contested proceedings against those banks that were unwilling to settle during 2014, with the likelihood of fines and subsequent appeals to the General Court. Parallel Swiss investigations into these indices are also expected to conclude later in 2014.

The investigations form part of a new type of cascading investigation, which has seen other benchmarking systems fall under suspicion, including:

• interest rate swaps;
• currency rates used in foreign exchange trading; and
• commodity products, such as oil, precious metals, gas and electricity.

Multiple investigations are running in parallel and involve competition authorities and sector-specific regulators in Europe and abroad. It is to be hoped that regulators will avoid drawing superficial parallels with ongoing financial indices investigations and benchmark mechanisms in other markets – since these tend to be complex and product specific, and should be looked at carefully on an individual basis.

Market participants involved in price benchmarks should ensure that robust internal compliance programmes are in place to prevent the individuals responsible for administering the benchmark from having either the incentive or the opportunity to manipulate the process.

Continuing recourse to commitments

Recent years have seen a marked rise in the number of antitrust cases resolved using the commitments procedure. The commission is expected to wrap up a number of high-profile Article 102 cases using commitments in 2014, including those involving Gazprom, Google and Samsung.

The use of commitments has the advantage of (relative) speed – the commission does not need to hold an oral hearing to allow companies under investigation to defend themselves or draft a long-form decision (for further details please see "EU merger regulation reforms increase merger parties' burden"). Companies involved will avoid potentially significant fines and, unlike the settlement procedure in cartel cases, do not concede any breach of competition law, thereby reducing their exposure to follow on damages actions. Since commitments decisions will not be appealed by companies under investigation, the legal standard adopted by the commission is less likely to be tested in court and may lead to boundaries being stretched in terms of the theory of harm. However, complainants do sometimes appeal, and the commission faces the prospect of at least one appeal in relation to the settlement decision reached with Thomson Reuters in 2013.

The docket of abuse of dominance cases which may settle in 2014 is replete with novel issues, including:

• whether a link between oil prices and gas prices can lead a supplier to be guilty of unlawful excessive pricing;
• whether an internet search operator is duty bound to present search results in an objective and neutral way; and
• whether EU competition law prevents a holder of standard-essential patents from seeking an injunction against a bona fide licensee.

Assuming that these cases are not appealed, the legal and business community will miss out on the development of valuable jurisprudence.

Rebates

During 2014 the General Court is likely to rule on Intel's appeal against its €1.06 million fine imposed by the commission in 2009. Although most commentators expect the outcome to be upheld, the court's treatment of the economic approach taken in the commission's Enforcement Guidelines will be of particular interest to businesses and their advisers. In the last major judgment on rebates (Tomra,C-549/10), the European Court of Justice (ECJ) was criticised for taking a lukewarm (at best) and confused (at worst) approach to the idea of an economics-based assessment for loyalty inducing rebates. The court will have a further opportunity to revisit this question later in 2014, following a reference from the Danish courts in Post Danmark (C-23/14). Post Danmark concerns individual rebates granted to four of Post Danmark's large magazine-mail customers, which were found to be unlawful by the regulator. It is to be hoped that the European courts take the opportunity in Intel and Post Danmark to endorse the economic approach, as articulated by the commission and increasingly by national authorities. This would lend further reassurance to businesses and their advisers seeking to design rebate schemes for pro-competitive reasons.

Technology transfer

Following a consultation in 2013, the commission is set to adopt a revised version of the Transfer of Technology Block Exemption and Guidelines by April 30 2014. The proposed changes are on the whole minor, but include some unhelpful tightening of the rules. New texts are set to be adopted by April 30 2014.

Merger control

Procedural reforms – one step forward, two steps back
January 2014 saw several procedural changes to the EU merger control regime take effect. Billed as a simplification project aimed at reducing the burden on parties to corporate transactions, a close reading suggests that in at least some cases, the new regime may increase the burden on businesses notifying under the EU Merger Regulation.

The good news for business is that the thresholds for using the simplified procedure have increased. A deal will now qualify for the short-form procedure where:

• the parties' combined market share on any horizontal overlap market is below 20% (increased from 15%);
• the parties' combined market share on any horizontal overlap market is less than 50%, but the merger results in a change to the level of concentration (measured by reference to the Herfindahl-Hirschman Index delta) that is below 150. Essentially, this will apply to deals with a small increment in market share; and
• the parties are active in vertically related markets and the market share of both parties is individually below 30%.

The commission has also suggested that where there are no overlaps or vertical relationships in the European Economic Area, there should be no need for parties to engage in pre-notification discussions with Directorate General for Competition officials.

The downside of the reforms is that commission will require parties to provide data on all plausible product and geographic markets, in both the simplified and long-form procedures. There are typically many plausible market definitions, even by reference to the commission's past decisional practice only (which is often inconclusive). This new requirement is likely to mean more discussions in pre-notification about precisely which data the case team must see to satisfy itself as to the lack of anti-competitive effects. It also potentially undermines the proposal to abolish pre-notification in cases where there are no overlaps – since parties will often need to check whether plausible other market definitions may lead to relationships that would require reporting.

For the first time, businesses using the simplified procedure (where there are some horizontal or vertical overlaps) will need to provide internal documents prepared for the management or supervisory boards or the shareholders in respect of the transaction. In the long Form CO there is a new requirement to produce an expanded list of internal documents, in some cases going back two years. The commission increasingly lends greater weight to internal documents rather than to the arguments made by notifying parties. The more documents that the merging parties must provide, the greater the risk that the commission will identify material detrimental to the parties' arguments.

Any company contemplating a deal that may trigger an EU merger filing will need to be mindful of the data and document disclosure requirements early on in any internal deal assessment and ensure that appropriate document-creation guidelines are in place, reducing the risk of hostages to fortune disrupting the review process.

Minority shareholdings
In 2013 the commission conducted a public consultation into the regulation of minority shareholdings (acquisitions of interests that fall short of control under the EU Merger Regulation). Legislative proposals are unlikely to materialise before 2015. Business should use the time to continue to lobby against changes that would constitute a significant administrative burden on the many minority shareholding transactions that do not risk competitive harm – not least with a view to discouraging emerging competition regimes in Asia and elsewhere from replicating the EU system.

Microsoft/Skype
In December 2013 the General Court rejected an appeal lodged against the Microsoft/Skype tie-up. The judgment will be of significant interest to the hi-tech sector and other markets. The transaction was cleared unconditionally in Phase 1 despite the combined market share of the parties being between 80% and 90% (on the market for consumer video communications made using Windows-based personal computers). The court emphasised that high market shares in innovative markets may be a poor indicator of market power and suggested that the fact that a particular product (eg, video communications) is provided free of charge will in itself imply market power, since it will lead to:

• consumer expectations of a free product;
• an unwillingness on the part of the consumer to pay; and
• a constraint against price increases.

Overall, the judgment provides a case study for companies with high market shares in the high-tech sector, including those contemplating transactions that would bring together leading positions in neighbouring markets.

Private damages initiative

On June 11 2013 the commission published a draft directive on private damages. It is nowbeing debated in the European Parliament and may (optimistically) pass into law in Spring 2014. A large part of the proposed law is intended to clear up the confusion as to when leniency statements and related documents should be subject to disclosure to claimants in damages proceedings following the ECJ's Pfleiderer judgment (C-360/09). In that case, the court left the balancing exercise up to national courts – which, unsurprisingly, led to divergent approaches to a defendant's disclosure obligations in different member states. The proposal classifies documents into three groups:

• leniency and settlement statements, which should always be protected from disclosure;
• other documents prepared by a competition authority (eg, statement of objections, requests for information and responses to such requests), which should not be subject to disclosure until the conclusion of the administrative procedure; and
• all other types of document (eg, pre-existing documents evidencing an infringement, even though these may have been submitted as part of a leniency application), which should be afforded no protection against disclosure.

The European Parliament has proposed amending the draft to allow national courts to order disclosure of leniency or settlement statements which it deems indispensable to the claim. This is an unwelcome change as it risks undermining commission and national leniency programmes, and may lead to inconsistency and uncertainty. Other proposals in the initiative cover:

• limitation periods;
• the passing-on defence;
• exposure to indirect customers;
• joint and several liability (and the ability to seek contributions from fellow defendants); and
• quantification of harm.

Ultimately, both Parliament and the council must agree on a final text, with an indicative date for a plenary vote set for March 11 2014. Stakeholders continue to lobby the two parliamentary committees responsible for the dossier.

In addition to the draft directive, the commission issued a non-binding recommendation to member states to implement rules permitting collective actions. The recommendation falls short of recommending US class-action-style litigation mechanisms, pointedly not recommending opt-out class actions. Opt-out class actions are where a class of potential claimants is automatically bound by the outcome of proceedings launched by one member of the class, unless they specifically opt out at an early stage. The recommendation is non-binding and member states may take divergent directions – for example, there is a draft proposal in the United Kingdom to permit opt-out class actions for antitrust damages actions in some circumstances.

Article 101 enforcement

Distribution agreements – key enforcement focus across Europe
A sustained upsurge in investigations (and fines) into distribution related issues was seen during 2013, with investigations conducted and fines imposed across Europe.

While the brunt of this caseload has been borne by national authorities, the commission conducted dawn raids in late 2013 targeting consumer electronics manufacturers suspected of restricting online sales. It has been 10 years since the EU regulator imposed fines for vertical restrictions. This latest investigation reinforces the message that resale price maintenance, restricting online sales and dual pricing (charging a different price based on whether a dealer sells online or in-store) are strictly prohibited. Meanwhile, national authorities are increasingly giving priority to enforcement of competition law in an online context, with the head of the Germany Federal Cartel Office saying recently that the agency aims to become a pioneer in regulating online commerce. In Switzerland, the authority has had recent successes in its attempts to penalise international companies for restricting passive sales into Switzerland from neighbouring European countries. This reinforces the importance of ensuring that distribution agreements do not (whether consciously or inadvertently) restrict dealers' abilities to sell to Swiss customers. A single complaint from a disgruntled distributor or bad document can be enough to trigger a lengthy investigation and fine. In addition to the number of investigations, it is also interesting to note the increased use of unannounced inspections to detect vertical infringements, a technique traditionally reserved for cartel activity.

National authorities are also taking aim at most-favoured customer clauses. These clauses typically link the price offered to one customer to prices offered to other customers – for example, an agreement always to offer the best price to a particular customer. Investigations into most-favoured customer clauses have focused particularly on online platforms, with price parity clauses – requiring sellers always to offer the best price to a particular platform – coming under scrutiny in both the United Kingdom and Germany. The concerns were that these clauses:

• reduce pricing freedom;
• lead to higher prices; and
• foreclose more efficient platforms.

A competition authority taking issue with such clauses must demonstrate their anti-competitive effects by reference to the market position of the supplier. Given that the majority of cases against most-favoured customer clauses have been settled, there is still a degree of legal uncertainty as to when most-favoured customer clauses are likely to be problematic and further developments can be expected.

Price signaling - the new enforcement frontier?
Emboldened by the European courts' endorsement of a strict rule of liability for unilateral unsolicited direct exchanges of information among competitors, 2013 saw both the commission and national authorities conduct investigations into price signalling (ie, unilateral public statements resulting in a collusive effect on pricing in the market). The topic has also been the subject of a 2012 Organisation for Economic Cooperation and Development roundtable. Unilateral price announcements are more likely to be problematic in concentrated markets for homogenous and commodity products. Investigations have focused on:

• container liner shipping (European Union);
• cement (United Kingdom);
• retail banking (Sweden); and
• mobile telephone operators (Netherlands).

It remains to be seen how EU and national courts will treat price signalling should an authority's decision be appealed, given the paucity of legal precedent in this area.

Businesses (especially those in concentrated markets) should consider carefully whether any unilateral statements on future pricing intentions are strictly necessary. For example, where a smaller number of customers is concerned, it should be considered whether the price increase can be communicated to customers directly rather than announced publicly. Just because the industry has always done it that way is no defence, as the benchmarking cases have demonstrated.

For further information on this topic please contact Tom Jenkins or Fiona Carlin at Baker & McKenzie by telephone (+32 2 639 36 11), fax (+32 2 639 36 99) or email ([email protected] or [email protected]). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.