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Cartel update

Fines expected for chemical wholesalers
The Austrian competition watchdog has announced that it has found sufficient evidence of participation by four companies in an alleged cartel in the print chemical sector.

The companies are suspected of agreeing price increases, cutting prices to exclude competitors, and adopting pricing policies towards certain customers from the mid-1990s until at least 2007.

The Austrian Competition Authority has the power to investigate but is not itself entitled to impose fines on companies for their participation in cartels (unlike the OFT in the UK which can impose significant fines).  It has therefore applied to the Cartel Court for fines to be imposed.

Airline alliances under attack
Airline alliances are a common feature of the industry but are under threat from the competition authorities. Various cooperation agreements between members of the Star Alliance (Lufthansa, Air Canada, United Airlines and Continental Airlines) are under investigation by the European Commission due to concerns that the agreements could restrict competition on the transatlantic routes. The Commission is also probing co-operation arrangements between three members of the oneworld alliance - American Airlines, British Airways and Iberia.

Interestingly, and in marked contrast to the Commission's approach, the US authorities proposed to grant antitrust immunity to Continental for its participation in the Star Alliance.

The airline companies have been the subject of numerous investigations for alleged cartel participation.

EU

Record-breaking fine for Intel
May proved a difficult month for Intel, as the European Commission imposed a record fine of €1.06 billion for Intel's abuse of its dominant position and ordered it to cease illegal practices immediately.

The Commission found that Intel tried to exclude competitors from the market of x86 central processing units (found in most of today's PCs). Firstly, it gave rebates to computer manufacturers on the condition that they bought all or almost all their x86 CPU from Intel. Secondly, it paid computer manufacturers to prevent sales of specific rival products.

The fine, which represents 4.15% of Intel's total 2008 turnover, is the highest fine ever imposed by the Commission.

Click here to read The Commission's press release relating to the fine. 

Under community law 'pure sporting rules', which are rules which bear no relation to economic activities governed by the EU Treaty, are exempt from scrutiny, including competition regulation.

It is FIFA's contention that the 6+5 formation is nothing but a pure sporting rule and, as such, should not fall under the scope of EU competition legislation.

In the renowned 1995 'Bosman' ruling, however, the court rejected claims that a similar rule constituted a pure sporting rule.  While this judgment did not actually deal with antitrust provisions, it was suggested that nationality clauses could fall foul of antitrust laws as well as free movement provisions.  Such assertions will not help the FIFA if its plan undergoes antitrust scrutiny.

In 2007 the Commission approved UEFA's rule requiring teams to include, in their squad for European cup tournaments, a certain number of players who have received the majority of their youth football training in the country of the club.  This "homegrown" player rule, however, was only waved through by Brussels after the original rule, based on the players' nationality, was scrapped in favour of the "homegrown" requirement, in order not to fall foul of the EU principle of non-discrimination.  The 6+5 rule would appear to go against the same principle. 

In the highly unlikely event that the rule, in its present form, would be given the Commission's blessing there would still remain a risk for UK football associations and clubs applying it, since it would also seem to be a clear breach of the prohibition on discrimination in section 1 of the Race Relations Act 1976.  Any club refusing to employ a foreign player because he would fill up the wrong quota would open itself up to a discrimination claim, and the FA would, arguably, also be liable for bringing in the rule in the first place.

A clause included in the Lisbon Treaty seeks to build a greater role for the EU in sport, allowing a co-ordination role and enshrining its special nature.  While FIFA might hope this will bolster its case for special status, it is highly unlikely to hold the commission back from antitrust intervention.

Although the plan will doubtless be finessed, there appear to be deep issues of competition law which it may be hard to circumvent with cosmetic changes.

British Airways comes away smelling of roses
The High Court has ruled in BAs' favour on a procedural point in a damages point action, by striking out the "class action" element of the claim. The damages claimed relate to losses caused by inflated prices for air-freight services, charged as a result of alleged concerted practices between BA and other airlines. This case is the latest in a growing trend of damages actions, which are increasingly being brought in the High Court, instead of the CAT for procedural reasons.

The claimant, Emerald Suppliers Ltd, import cut flowers from Columbia and Kenya using the air freight services of BA and other airlines. It claimed that BA had been party to agreements to fix the prices at which air freight services are supplied, or to control or share the market for the supply of those services, contrary to competition law.

The claimant brought a representative action, which brought together around 180 separate claimants. Representative actions can be brought where more than one person has the same interest in a claim. The claim may be brought by one or more of the persons who have the same interest as representatives of other parties.

The High Court allowed BA's application to have the representative element of the claim struck out, concluding that, in order to represent claimants having the same interest, it must be possible to identify claimants that belong to the class to be represented at the time the claim is made. In this case, the criteria for inclusion in the class depended on the outcome of the action itself. The High Court confirmed that it is impossible to say that any given person was a member of the class purportedly represented by the claimant at the time that the claim form was issued. In addition, the High Court did not consider that the claimants had the same interests. Whether or not some members of the class would be able to obtain damages from would depend on their position in the distribution chain and whether they had passed on any loss to their buyers.

The judgment illustrates the difficulties inherent in damages claims. However, it comes ahead of new legislation currently being finalised by the European Commission, which aims to improve such private enforcement.

The proposals allow 'qualified entities' to bring claims without individually identifying all the injured parties, provide for actions in countries other than the place of the reviewing authority and promote access to evidence while protecting leniency information.

The proposed provisions aim to allow claimants to recover the actual loss, together with the lost profit and interest, suffered when buying goods and services from companies involved in cartels or market abuse, up to two years after the infringement decision has become final.

Click here to view The Commissions White Paper.

The Court of Appeal has also recently handed down a ruling which favours the defendant BASF in a damages claim based on the vitamins cartel the court held that the claim against the company was time-barred. The Court reversed a ruling by the Competition Appeal Tribunal and stated that the clock for bringing damages claims can start even though legal challenges against fines are pending before the EU courts. The damages action now needs an extension of time from the CAT to proceed.

MasterCard and Visa see red over interchange fees
In the latest round over interchange fees between competition authorities on the one hand and Mastercard and Visa on the other, Mastercard has reached a (perhaps temporary) truce whilst the Commission has continued to aim fire at Visa.

MasterCard has struck a deal with the European Commission, giving the credit card company a brief respite while the significant fight over the legal principles plays out in court.

MasterCard has made undertakings to reduce its cross-border interchange fees, abolish a new scheme fee and increase transparency over its charges, measures which the Commission has welcomed.

An interchange fee is the fee charged by the bank which issued a payment card to the consumer (the issuing bank) and paid by the retailer's bank (the acquiring bank) for processing a payment card transaction.  In December 2007, the Commission decided that MasterCard's interchange fees restricted price competition by artificially inflating the base prices charged by banks for accepting payment cards, which breached Art 81(1) EC Treaty.  MasterCard have appealed this decision to the Court of First Instance, challenging the Commission's application of Art 81(1) and Art 81(3). 

Since the decision in 2007, MasterCard has been in negotiations with the Commission which has resulted in these recent undertakings, which are aimed at obviating any risk to competition.  These undertakings include reducing cross-border interchange fees and implementing measures to increase transparency, for example publishing cross-border interchange fees on its website.

Meanwhile, shortly after the announcement of MasterCard's deal with the Commission, Visa Europe has been formally charged by the European Commission over its interchange fees.  The Commission has sent a "statement of objections" to the company, claiming that the interchange fees set by Visa Europe restrict competition without producing sufficient offsetting benefits for consumers.

Visa has also been in separate negotiations with the Commission, however, has a difference of view with Brussels and Mastercard over how this new methodology should work in relation to the same issues.  This is just the next twist, as the controversial issue of interchange fees makes its way through the European courts.  Many national competition authorities are understood to be holding their investigations on interchange fees while MasterCard battle before the Court of First Instance, otherwise there is a risk of national competition authorities, running their own investigations, end up using divergent approaches, which may differ from the European Courts.  However, the legal certainly desired by MasterCard, Visa and the national competition authorities may still be some time away.  

"Presumption" of parent company liability confirmed
A legal adviser to the European Court of Justice has suggested that the court should find Akzo Nobel responsible for the anti-competitive activities of its subsidiaries, despite the activities taking place prior to its acquisition by Akzo Nobel, advocating of a strict interpretation of parent company liability in competition cases.  This would make it very difficult for parent companies to avoid paying fines for activities which they had no control over. This confirms a recent trend by the Commission to impose liability up the chain which allows higher fines to be imposed.  

The Dutch chemical company was fined EUR 21 million in 2004 for its part in a cartel for feed additive choline chloride.  The Akzo parent company, although not one of the direct cartelists, was found jointly responsible along with the subsidiaries who had taken part in the cartel.

Akzo Nobel's appeal before the Court of First Instance was rejected, prompting its appeal to the European Court of Justice to clarify the issue of parent company liability.

Although Akzo Nobel was in a position to exert "decisive influence" over its subsidiaries, recent CFI case-law has indicated an increase in the requirements to prove the actual exercise of that influence.

The ECJ was advised against adopting this approach, and previous ECJ case-law was endorsed, which stated that there was a "rebuttable presumption" that a parent company was liable.  

Beware the pitfalls of standard-setting
Consumer goods are increasingly based on standards. Standards can be the result of an agreement between competitors, through their trade association or otherwise.  Alternatively, standards may emerge spontaneously through market development resulting in particular technology becoming an industry standard.  When companies are party to an agreement on standards, or acquire patents in technology corresponding to a standard, particular care must be taken to avoid competition infringement.

Usually, standards have positive impacts on competition and as a result national and European competition authorities have generally adopted a "light touch" approach.  Standards can intensify price competition as consumers find it easier to compare products with the assurance that goods or services conform to a minimum quality.

Standards also may reduce producer costs, as the producer can plan longer production runs as a result of needing to manufacture a smaller range of goods or components, and distribution systems may be simplified. Standard setting may also increase efficiency and allow interoperability between products.  Furthermore, uniform international standards can promote market entry.

However standard setting can have a detrimental effect upon competition, and the risk of being subject to European Commission or national investigations should not be dismissed lightly in such a finely balanced area of the law.  In 2007, for example, Rambus was accused of claiming unreasonable royalties for the use of its patents which were required to comply with certain standards.

More recently, a Swedish cement company (EMC) claimed before the European Court of First Instance that European Portland producers acted as a cartel creating barriers to entry in the European cement market, through the adoption of a standard.  According to EMC, this standard has been adopted in a form which excluded all new cements that could compete with Portland cement.

Standard setting can assist in creating an open market, but also poses competition risks. 

UK

Rare success for "failing firm" defence
In these tough economic times, will competition authorities allow acquisitions of companies which would otherwise not survive, by accepting the so-called "failing firm" defence?

The Office of Fair Trading ("OFT") announced recently that it has cleared the acquisition by HMV plc of 15 Zavvi stores, accepting the "failing firm" defence put forward by HMV. As a result, the acquisition will not be referred to the Competition Commission. Prior to Zavvi going into administration at the end of 2008, Zavvi and HMV were the leading retailers in the UK of entertainment products. Zavvi was formed in 2007 following a management buy-out of Virgin Megastores.

This is only the fifth time since the Enterprise Act 2002 that the OFT has allowed the failing firm defence - and the only case since the OFT re-stated in December 2008 its approach to the acquisition of "failing firms" by competitors.

The OFT will only clear a transaction based on failing firm claims if it has sufficient compelling evidence that there is no link between the merger and any competitive harm in the market, i.e. that the target business would inevitably have exited the market in the near future and that there was no "realistic and substantially less anti-competitive alternative". These can be difficult conditions to satisfy.

The OFT noted that it had received "compelling evidence" that the failing firm test had been satisfied on the following basis: without the merger, the 15 Zavvi stores would inevitably have exited the entertainment retail market as a result of the company's collapse and there was no "less anti-competitive alternative" to the merger in the overlap areas, and this included no other realistic entertainment retail purchaser for the stores.

The OFT commented that the evidence in support of a failing firm in the case of Zavvi was so overwhelming that they considered it unnecessary to carry out a detailed market analysis. The demise of Zavvi suggests yet another victim of the recession and indeed, the OFT has stated that it is a sign of the times that the OFT noted in December that it will take into account "prevailing economic and market conditions" when assessing evidence presented to support failing firm claims. It remains to be seen how many other "failed firms" the OFT would need to apply this approach to in the coming months.

Click here to see the OFT's final report.

International

Are we paying too much for our food?
Food prices are under the spotlight as the Dutch competition authority and European Commission launched investigations, in April and May respectively, to seek to establish how prices are formed.

These investigations are the result of a report published last December by the European Commission which raised concerns over a potential obstacle to competition in the food market.

Nevertheless, neither the Dutch Competition watchdog nor the European Commission have for the moment expressed the intention to open a formal antitrust probe. However, the outcomes of the investigations might change the situation.

The problems with food pricing are a concern shared by many competition authorities all over the world.

Beware the dangers of interlocking directorships
Reports have emerged that the US Federal Trade Commission ("FTC") has commenced an investigation into the ties between the boards of Apple and Google, for potential infringements of competition law.

The technology companies currently share two directors.  "Interlocking directorships" such as this, are not uncommon.  However, they can give cause for concern in certain circumstances.  In the US, under section 8 of the Clayton Antitrust Act 1914, there is a general prohibition on an individual serving as a director on the boards of two companies at the same time, if those companies are competitors and sales of the competing products or services exceed the de minimis thresholds.

Following the leaked reports of an FTC investigation, Google confirmed that it is aware that the FTC is considering the interlocking directorships.  It maintains that no conflict had ever arisen as the director has always recused himself from any discussions relating to products and services in which Apple and Google compete.

The case highlights that the issue of interlocking directorships remains of interest to competition authorities concerned about information exchange between competitors and consequential anti-competitive effects, i.e. the "interlocking director" could act as a conduit for the anti-competitive transfer of price and future strategic information.  Companies involved in interlocking directorships need to remain vigilant in their corporate governance procedures to ensure that such risks do not materialise.

State aid

Further "recession-busting" measures approved
The European Commission has approved under EC Treaty State aid rules the UK Homeowners Mortgage Support Scheme, an initiative aimed at reducing the level of home repossessions that are likely to occur as a result of the current economic downturn. The scheme allows households that, following a temporary drop of income, are unable to meet their mortgage repayments to defer all of their principal and up to 70% of their interest repayments for a period of up to 2 years. In return, the UK will provide the lender with a guarantee on part of the deferred interest.

The Commission concluded that this aid measure is compatible with the state aid rules as it provides an aid of a social character to individuals, affected by a temporary income shock and at risk of losing their home, on a non-discriminatory basis. The Competition Commissioner also declared that it was appropriate in the midst of the current financial crisis that help is given not just to banks but also directly to individuals that are in difficulty as a result of the downturn.

Contact us

If you think your business may be affected by any of the above, or if you have any other questions, please contact:

Michael Dean
Partner
0141 303 2415
michael.dean@mms.co.uk

Catriona Munro
Partner
0141 303 2385
catriona.munro@mms.co.uk