Welcome to the latest issue of our EU, Competition & Regulatory Update. This update focuses on recent developments within the sector.

Contents

• Cartel Update
• - Pharmaceutical cartels
• - Animal feed phosphate
• UK
• - Live Nation/Ticketmaster, not music to everyone's ears
• - The sky is the limit, but not for BSkyB
• - Morrisons dares to go where no company has gone before in suing employees
• EU
• - C'est la vie...
• International
• - Don't jump the gun
• - All black for MasterCard and Visa in New Zealand
• Contact Us

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Cartel Update

Pharmaceutical cartels
On 7 January 2010, the Commission announced that it was opening a formal investigation into the international pharmaceutical company, Lundbeck, which is based in Denmark. The Commission will examine certain agreements entered into by Lundbeck with generics companies that may be delaying entry of the anti-depressant drug, citalopram into markets in the European Economic Area.

Similarly, Les Laboratoires Servier (Servier), a French based company, is being investigated by the Commission for breaches of EU competition law. The Commission suspects that Servier may be party to agreements which restrict entry of the drug perindopril to the market. Perindopril is a cardio-vascular medicine which was originally developed by Servier. As part of the proceedings, generics manufacturers including Krka d.d. (based in Slovenia) and Lupin Limited (based in India) are being investigated in relation to potentially anti-competitive agreements between each of them and Servier. In these agreements the generics companies agree to hold off on launching copycat drugs in return for a payment or other consideration.

These investigations follow the Commission's recent inquiry into the pharmaceuticals sector which covered all EU member states. The Commission reported its findings in July 2009, concluding that market entry of generic drugs is delayed and there is a decline in the number of novel medicines reaching the market. As a result of its findings, the Commission has said that it will be increasing its scrutiny of patenting systems and any apparent anti-competitive measures adopted by companies in the pharmaceuticals industry.

Animal feed phosphate
On 8 January 2010, the Commission confirmed that it sent a statement of objections to animal feed phosphate companies concerning a suspected cartel aimed at fixing the prices of their products. Phosphate is used as a supplement in animal feed to help growth and reproduction of livestock animals. Belgian chemicals and plastics company Tessenderlo and Finnish chemicals maker Kemira have confirmed that they have been contacted as part of the investigation. Neither of these companies has been involved in a cartel investigation before. A number of other types of animal feed supplement have however been investigated, including vitamins, lysine and methionine.

UK

Live Nation/Ticketmaster, not music to everyone's ears
In an unusual move which will add further to the Competition Commission's (CC) woes, its decision to clear the merger between Live Nation and Ticketmaster has been quashed. Achieving an unconditional clearance of a merger that has been through the mill with the CC and, indeed, has been given a provisional "thumbs down" by the CC at the penultimate stage of its procedure was a surprise result for Live Nation and Ticketmaster. However, a recent appeal lodged against the merger prompted the CC to agree to reconsider its decision. This latest development in merger control illustrates that mergers are becoming more contentious, even those which have received clearance.

The merger would see the coming together of Live Nation, the world's number one promoter and Ticketmaster, the world's number one ticket retailer. Not so here, as an aggrieved third party, CTS Eventim, the world's second largest ticket retailer (with virtually no presence in the UK market) lodged an appeal with the Competition Appeal Tribunal (CAT).

Live Nation and Ticketmaster have a history of working together on the basis of long term agreements, making Ticketmaster Live Nation's preferred, and sometimes exclusive, supplier of ticketing services. These agreements came to an end in 2009, and as a replacement Live Nation signed a contract with CTS Eventim that would see the company supplying Live Nation with a managed ticketing service. However, both Live Nation and Ticketmaster had intentions of developing their business and agreed to merge. Despite this proposed merger, Live Nation committed to comply with its obligations to supply CTS Eventim with a prescribed number of tickets under its agreement.

In October 2009, the CC provisionally concluded that the merger would be likely to prevent a major new entrant in the UK (CTS Eventim) from becoming an effective competitor in the market for the primary retailing of tickets for live music events and, accordingly, that this would cause a substantial lessening of competition in that market.

After publishing its Provisional Findings, the CC reported that it received new evidence in relation to the proposed merger, and subsequently concluded in its Final Report, published on 22 December 2009, that there would not be a substantial lessening of competition in any market as a result of the merger. The new evidence was that Live Nation explained that whether or not the merger went ahead, it would not give CTS Eventim any more than the minimum number of tickets it had agreed to. Giving CTS Eventim any more tickets would harm Live Nation's primary intention of selling as many tickets as possible through its own website. In addition, CTS Eventim would need to forge relationships with other promoters to become an effective competitor in the UK market.

CTS Eventim submitted an appeal to the CAT challenging the CC's decision. It asked the CAT to quash the decision and remit it back to the CC for reconsideration. CTS Eventim argued that the CC did not properly take account of all relevant considerations and that the reasons behind its decision are inadequate.

The CC accepted CTS Eventim's argument that it was not given a fair hearing and therefore asked the CAT to quash its decision (not having the power to do so itself). The CC will now reassess the proposed merger. It remains to be seen whether hearing CTS Eventim will change the outcome.

This appeal shows the difficult position in which the CC now finds itself, as its decisions become more contentious. In future it may be hesitant to reverse its provisional findings on the grounds that it received new evidence, without further consultation with all parties involved, as it will run the risk that aggrieved third parties challenge its decision.

Click here to read the CAT's judgment.

The sky is the limit, but not for BSkyB
Last month, the Court of Appeal confirmed earlier decisions that BSkyB should reduce its shareholding in ITV to below a level giving it "material influence" over the company. It will now be required to sell a substantial proportion of the 17.9% stake it acquired in November 2006, so that it does not hold any more than 7.5% of the shares in ITV. It is interesting to note the low level of shareholding that is deemed to give rise to "material influence" in this case.

BSkyB appealed to the CAT on the ground that the CC erred in law and acted irrationally in concluding that the share acquisition would result in a substantial lessening of competition in the TV market. However, in September 2008 the CAT refused BSkyB's appeal, holding that it had not identified any flaws in the CC's investigation and that requiring BSkyB to divest some of its shares was a proportionate remedy.

Determined to battle on, BSkyB appealed against the CAT's decision to uphold the CC's findings, arguing that the CAT erred in the way in which it reviewed the CC's Final Report. The Court of Appeal held that having specialist knowledge does not mean the CAT should apply a greater intensity of review than in a standard judicial review application. The CAT had therefore not erred in reviewing the CC's decision in the way it did. The Court also noted that many of BSkyB's arguments did not really raise any points of law. It held that BSkyB was essentially asking the Court to reconsider the evidence and come to a different decision, which it could not do. The Court also held that the CC's rejection of BSkyB's alternative remedies was not irrational, and that divesting shares would be the most proportionate remedy.

BSkyB has now undertaken to sell around 10.4% of its shareholding in ITV. Its 2 year legal battle to retain the shares it purchased is now at an end, as the company has confirmed it will not appeal this latest decision. The embattled CC will be relieved that its decision has been upheld, especially as regards the standard of proof and intensity of review it applies in assessing mergers.

Morrisons dares to go where no company
has gone before in suing employees
The question of whether a company can sue its directors and employees to make them pay the price for breaching competition law has always been a hot topic for debate, with never a straight-forward answer. As fines go up, the incentive for companies to offload the liability onto individuals also increases. However, the English High Court has moved a step closer towards clarifying this issue after it allowed claims by companies in the former Safeway group (now owned by Morrison) against former directors and employees for damages resulting from breaches of competition law.

In 2005, the OFT began investigating collusion between supermarkets and dairy processors in relation to the exchange of price information of certain dairy products. In 2007 it concluded "early resolution agreements" with certain parties including Safeway, under which they admitted liability, agreed to cooperate with the OFT and agreed to pay a fine. Safeway agreed to pay almost £16.5 million once the OFT concludes its investigation, which would be reduced to £10.7 million for cooperating with the OFT. By the time the OFT was investigating these practices, Morrison had completed its acquisition of the Safeway group and so will be liable to pay this fine. Morrison is contesting its own alleged involvement in these practices. A final decision from the OFT is expected this year, with this fine imposed on Safeway yet to be paid.

The claimants, companies in the former Safeway group, have brought claims for damages and/or compensation against former directors and employees, the defendants, and indemnity against the liability for this £10.7 million fine which the OFT will impose if it finds that Safeway was guilty of anti-competitive practices. The claimants allege that the defendants breached their employment contracts and duties owed to the company by participating in and facilitating the initiatives, and not reporting them to their superiors or board of directors.

The defendants applied to have this action struck out, arguing that the claim is contrary to public policy on two grounds. Firstly, it was argued that it infringes the rule that a person who commits an unlawful act cannot bring an action for indemnity against the liability which results from the act, i.e. a person cannot profit from their own wrongdoing. Secondly, it was argued that the action is inconsistent with the competition regime in the UK: the Competition Act does not provide for direct civil liability on directors or employees for conduct which leads to breaches of this Act.

The High Court decided that the claim should be allowed to proceed to trial. It concluded that the claimants would not profit from their own wrongdoing in recovering damages and indemnity from the defendants. The wrongful acts alleged to have been committed were carried out by the defendants during their employment. These acts were not endorsed by the boards of directors or shareholders, so the claimants were not directly responsible for them. Additionally, employees should be considered as owing a duty to their employer not to put their employers in breach of competition law. There is therefore no reason why the penalty for breaching the law should not be passed on to the individuals who commit the unlawful acts. As a result, the case will now continue and fuller arguments and evidence will be heard.

This case is the first in which a UK company found guilty of price-fixing has tried to recover the penalty imposed by the OFT from the individuals involved. However, companies are able to recover penalties from employees for other breaches of law, and so this situation is not entirely new. Shareholders might also, in principle, be able to bring damages claims, known as derivative actions, against company directors for breach of their duties owed to the company and shareholders. If Morrisons win this case, it could make employees more hesitant in helping the OFT with investigations, knowing that if anti-competitive behaviour is found to have taken place, they could be forced to pay part of the penalty. The final decision in this case will have implications for both companies and individuals, and serves as a reminder of the harsh consequences for breaching competition law.

EU

C'est la vie...
The largest ever fine imposed by France's Competition Authority has been reduced from €575.4 million to €73 million. The fine was originally imposed by the Conseil de la Concurrence in December 2008 in relation to 11 steel trading companies' participation in a cartel. The French Court of Appeal considered that the damage to the economy caused by the cartel was proven but moderate. It was held that the level of fines should be based on the turnover of the individual companies that were found to have acted as a cartel, not on that of their parent groups. It also considered the recession as a mitigating factor. The judgement may be subject to a further appeal.

International

Don't jump the gun
Across the pond, US competition authorities have shown a no tolerance attitude towards merging companies which do not hold themselves as separate entities until the anti-competitive effects of the merger have been analysed. In September 2006, Smithfield Foods Inc. and Premium Standard Foods LLC announced their proposed merger to the Department of Justice (DOJ) and the Federal Trade Commission. There is a 30 day pre-merger waiting period during which the companies must remain independent while the transaction is investigated for anti-competitive effects. However, in this case, Smithfield exercised "operational control" over a section of Premium Standard's business during the waiting period. For instance, Premium Standard Foods submitted contracts to Smithfield for approval of terms relating to price, quantity and length of contract. On 21 January 2010, the DOJ announced a settlement that requires the companies to pay a total of $900,000 in civil penalties for this violation. This conduct, known in the USA as "gun jumping", violates the Hart-Scott-Rodino Antitrust Improvements Act 1976 (HSR Act).

Meanwhile, the Federal Trade Commission has recently announced its annual revised premerger thresholds under the HSR Act, and for the first time, the thresholds have been reduced. Currently, there are thresholds in relation to the size of the person and the size of the transaction. For the size of the person test to be satisfied, one of the parties to the transaction must have at least $130.3 million and the other $13 million worth of assets/net sales. These thresholds are being reduced to $126.9 million and $12.7 million respectively from February 2010. For the size of the transaction to be satisfied, the voting securities or assets of the acquired person must be valued at greater than $65.2 million (US$63.4 million from February 2010). Filing fees for premerger notifications will remain the same.

All black for MasterCard and Visa in New Zealand
The New Zealand Commerce Commission will be monitoring developments concerning credit card surcharges recently introduced by retailers for customers paying by credit card.

The Commission investigated arrangements between the major trading banks and visa and mastercard in relation to the fees they were charging retailers for credit card transactions. Previously, the retailer was not allowed to pass this charge on to the consumer. Following the Commission's settlement with several financial institutions last year, including MasterCard and Visa, credit card issuers will now be able to set their own credit card transaction fees in competition with one another. Retailers will be able to pass on this cost directly to the consumer. This fee may vary depending on the charge imposed on the retailer.

The settlement was aimed at promoting more competitive fees between credit card companies and the idea is that, in the long term, retailers will be able to benefit from reduced rates which will then be passed onto the consumer.

The Commission will be monitoring this new setup to ensure the interests of the consumer remain the paramount consideration.

Interchange fees, such as those imposed by Visa and MasterCard, are still being investigated by the European Commission. MasterCard has been in discussions with the Commission following the Commission's finding that MasterCard's interchange fees breached Article 101(1) EC Treaty. MasterCard is currently appealing the decision before the Court of First Instance. Visa has been sent a statement of objections and is awaiting a decision on its interchange fee compatibility with EU law.

There is an ongoing investigation by the OFT into domestic interchange fees in the UK. This affects both MasterCard and Visa. There have also been investigations in Poland, Spain, Italy, Switzerland, Hungary, USA and Canada.

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