EC Competition Law

Commission Notice on Immunity from Fines: the "whistle blowers charter"

In 1996 the Commission adopted a Notice providing for the non-imposition or reduction of fines for participants in cartels who decided to blow the whistle or otherwise co-operate with the Commission in providing evidence leading to a prohibition decision.

This new 2002 Notice, which replaces the 1996 version, is more specific as to the circumstances under which immunity from fine will be granted and the "tariffs" for fine reduction where a cartel member has co-operated in a Commission investigation.

The Commission will grant an undertaking immunity from fine if it is the first to submit evidence triggering the Commission’s investigation or to enable the Commission to find that there has been an infringement of Article 81. Immunity will not be available if the Commission already has sufficient evidence either to carry out the investigation or to find an infringement. In such circumstances, however, a reduction in fine may be available.

Any such immunity is conditional upon the undertaking concerned co-operating fully "on a continuous basis and expeditiously" with the investigation. The undertaking must end its involvement in the cartel and must not have been involved in any attempt to coerce other undertakings to participate in the infringement.

Fine reductions will be available where an undertaking provides evidence of the suspected infringement "which represents significant added value with respect to the evidence already in the Commission’s possession".

The first undertaking which supplies such evidence would benefit from a reduction of fine of 30-50%, the second undertaking a reduction of 20-30% and any subsequent undertakings would obtain a reduction of up to 20%.

At a talk given to EMAC in Brussels on the 11^th September 2002, Mario Monti, the European Commissioner in charge of Competition Policy, explained that 2001 had been a record year for the discovery of cartels, with ten cartels involving 61 firms being investigated by the Commission. In total these companies had fines imposed on them amounting to € 1.8 billion.

Mr Monti said that the fight against cartels was given increased priority around 1998, when the Commission increased the resources devoted to the work. During this period the number of officials engaged on the investigation of cartels doubled. A further increase in resources to fight cartels was planned for this year.

Mr Monti added that the Leniency Rules had been successful in encouraging companies to disclose participation in cartels in return for immunity from fine and expected that the recent changes in the Rules should further boost the discovery and elimination of cartel behaviour.

On the 30th September 2002, the Commission published an explanatory brochure on the new group exemption for motor car distribution and servicing which entered into force on 1 October 2002.

The brochure provides a user-friendly guide to the consumer of their rights and obligations under the new regulations. Using a ‘question and answer’ format it also explains the philosophy underpinning the regulations and competition laws within Europe, in order that the new rules are implemented efficiently.

The purpose of the new group exemption (EC Regulation 1400/2002) is to promote competition, quality and choice in the maintenance sector and enhance dealers’ commercial independence. Distributors are now able to operate with greater freedom and to open multi-brand dealerships. Independent repairers are now granted access to technical information.

The brochure is available on the Competition DG’s website:

- Http://europa.eu.int/comm/competition/car_sector

On 24 July 2002 the Commission fined seven producers of industrial and medical gases a total of € 25.72m. This was for participating in a cartel in the Netherlands between 1993 and 1997.

The Commission identified that the companies had regular meetings to discuss price increases and other unfavourable trading conditions offered to customers, including:

• minimum prices when offering bulk sales to new clients

• introduction of delivery and transportation charges for supplies of bulk sales

• environmental and safety charges on supplies of gas cylinders

• charging rent for gas cylinders

• arranging not to deal with each other’s customers for a period in the year, usually between 2–5 months, in order to increase prices and retain their customers.

The Commission found that this was a clear breach of competition law and accordingly fined the seven companies between € 0.43m and € 12.6m each. The Commission calculated the individual fines according to the level of participation in the cartel and their co-operation with the investigation.

The Commission has fined five companies a total of € 135.22m for their participation in a cartel in the citric acid industry. The Commission identified that the infringement began in 1991 when the companies, headed by Hoffmann-La Roche, arranged meetings to consider how to improve the sales of citric acid after the decline in sales in the late 1980’s. The cartel pursued four main objectives:

• sales quotas were established for each company, which were based on a market share figure

• ‘floor’ and ‘target’ pricing, to ensure minimum price levels were maintained

• price discounts to customers were stopped, except to the five largest consumers

• detailed customer information was exchanged

The Commission also uncovered evidence that a monitoring system was established to make sure the objectives were maintained. The companies achieved this by regular meetings and the exchange of monthly sales figures. The companies also established a compensation scheme that penalised companies that went over their sales quotas and compensated those who did not reach it.

The cartel continued to operate until May 1995 when the cartel came to an end due to growing imports from China and cheating on the part of cartel participants.

Following receipt of a number of consumer complaints concerning restrictions on the export of new motorvehicles by Mercedes Benz, the Commission carried out an investigation into the Mercedes Benz European dealership network from which the following anti-competitive practices were identified:

• export restrictions in Germany, where Mercedes Benz had instructed its agents on several occasions not to sell vehicles outside their contract territory and had tried to make it more difficult for them to engaged in parallel exporting

• a prohibition in Germany and Spain of supplying outside leasing companies where there was no specific lessee. The Commission found that this made it impossible for leasing companies to purchase large volumes of cars and sell from stock, thereby obtaining the same price advantages as fleet operators, both in terms of prices and delivery conditions

• the setting of sales prices in Belgium through an agreement between Mercedes Benz and the dealers association to limit discounts to 3% and having a test buyer check the level of discounts on certain vehicles

The Commission took the view that the infringements identified above were particularly serious, although of medium duration. The Commission rejected Mercedes Benz’s argument that the fact that the infringements were perpetrated by junior staff and not by members of the managing board was a mitigating factor. The Commission indicated that if staff send circulars or letters in the course of their duties to agents or dealers, then the manufacturer must take responsibility. A fine of EUR 71,825 million was imposed.

Of interest in relation to market definition in the motor vehicle sector is that the decision divides the domestic car market into a number of segments based on factors such as purchase price and vehicle length, taking the view that other factors such as engine capacity, quality and brand image play a smaller role in determining the segment to which a vehicle belongs. The Commission identified the following segments:

• very small cars;

• small cars;

• medium cars;

• upper medium cars;

• executive cars;

• luxury cars;

• multi purpose vehicles and sports cars.

In a decision adopted on 30 October 2002, the Commission found that the world’s two leading auction houses, Sotheby’s and Christie’s, had breached EU Competition rules.

Between 1993 and early 2000 it was established that both parties had entered into an anti- competitive cartel agreement that fixed commission fees and other trading terms, with the aim of reducing the fierce competition which had previously existed between the two companies.

The Commissions investigation began when Christie’s approached both the EU Commission and the United States’ Department of Justice with proof of the agreement and applied for leniency in accordance with the relevant "whistle blowers" immunity scheme. (In the EU the 1996 Commission Leniency Notice has recently been updated, as discussed above).

As the investigation was only initiated because of Christie’s actions it was granted full immunity and escaped being fined. Sotheby’s was also co-operative throughout the investigation and accordingly its fine was reduced by 40%. However, because the agreement was considered to be "a very serious violation of Article 81(1)", it was still fined € 20.4 million (i.e. 6% of the company’s worldwide turnover).

In another Commission decision of 30 October 2002, the Japanese computer games manufacturer and seven of its European distributors were fined € 167 million, the fifth highest amount ever imposed for a competition law infringement.

During a seven year period it was discovered that these companies were preventing exports to high priced countries from low priced countries. This was because the price differences between EU countries varied considerably, with the UK being up to 65% cheaper.

The Commission found that each distributor was under an obligation to prevent parallel exports from its territory. Under the leadership of Nintendo they colluded to identify parallel exporters of the games, who were subsequently supplied with fewer products or completely boycotted.

Given the seriousness of the infringement and the harm caused to the end consumer, the Commission imposed very high fines. The highest fine was imposed on Nintendo because the company continued to operate

the system even after the investigation began.

On 5 July 2002 the Commission published a decision exempting a Co-operation Agreement between the European airlines Lufthansa and Austrian Airlines.

Lufthansa is one of the largest European airlines, ranking number two in terms of world traffic behind British Airways and just above Air France. Austrian Airlines is the fourteenth largest European carrier.

The long term objective of the Co-operation Agreement is worldwide integration of their networks. The area of principal concern for the European Commission was the proposal for the development of joint services for Austrian-German traffic.

The Commission found that the parties had a combined market share of 100% on 27 out of a total of 33 routes between Austria and Germany. These 27 routes account for more than 90% of total traffic between the two countries. Thus the parties were by far the strongest competitors on the Austrian – German air transport market.

Nevertheless, the Commission accepted the desirability of the rationalisation of the European transport industry and in particular that the merger of the complimentary networks provided by the parties would give rise to important synergistic effects. On the other hand, the Commission doubted whether the Co-operation Agreement ensured that consumers would share in the benefits of the expected costs savings, (e.g. through lower prices) and also that the Co-operation Agreement would lead to the elimination of competition on a number of routes between Austria and Germany.

The Commission appears to have accepted the parties argument that all European airlines could be considered potential competitors but only on the basis that perceived entry barriers were removed or reduced.

With this objective in mind, the Commission agreed to grant an exemption to the Co-operation Agreement until 31 December 2005, on condition that the parties accepted a number of conditions designed to assist in creating opportunities for new market entrants. In particular the parties have agreed to make available airport "slots" to new entrants, to limit the risk of selective price reductions to discourage new market entrants and to facilitate interline agreements with new entrants on a non-discriminatory basis.

The Commission has ruled that Michelin (France) had abused a dominant position when it continued to apply a system of rebates and other price incentives designed to encourage customer loyalty.

Michelin, who was found to have 60% of the French market for replacement car tyres (twice the number of its nearest rival), set up a number of incentives that were seen as tying dealers to the company.

In setting the fine of € 19.76 million for the breach of Article 82, the Commission took into account the following as aggravating factors:

• the abuse had occurred over a period of more than 19 years;

• Michelin had already been fined for a similar infringement in Holland in 1981.

In 1999 the Commission granted an Article 81(3) exemption to Whitbread in respect of the "Whitbread Pub Partnership" ("WPP") lease which contained a beer tie. In doing so the Commission accepted Whitbread’s evidence to show that tied tenants received countervailing benefits which compensated for the high tied prices they were required to pay for its beer.

A number of Whitbread tenants appealed the decision to the Court of First Instance (CFI) arguing that the Commission was wrong in relying upon the evidence supplied by Whitbread and should have investigated the position itself, seeking evidence from WPP tenants which would have shown that Whitbread had exaggerated the extent of the alleged benefits.

The CFI rejected the tenants’ application on the basis that the Commission had a wide discretion under Article 81(3) and there was no evidence of manifest error sufficient to amend the Commission decision.

Following closely on the heels of its decision to reverse the Commission’s decision to block the Airtours/First Choice merger (as reported in our last newsletter), the CFI has once again overturned a Commission decision to block a merger.

Tetra Laval has been held to have a dominant position in its main market, comprising aseptic carton packaging and associated equipment for producing such packaging, used primarily for packaging fresh milk and fruit juice. In this merger Tetra Laval acquired the French company Sidel, which was a major producer of PET packaging equipment, used primarily to package water and carbonated soft drinks.

The Commission found that aseptic carton packaging and PET were two separate markets and that there was no significant overlap in activities between the merging entities. Despite this the Commission decided to block the merger on two grounds:

• that the merger might lead to the elimination of potential competition, as there were certain uses where carton and PET might in future become practical alternatives, (e.g. milk, juices, tea/coffee and fruit flavoured drinks).

• that the merger might lead to the creation of dominance in PET through leverage. The Commission considered that with advances in technology, there was an increasing likelihood that PET packaging would be offered as a substitute for cartons, thus leading to a substantial customer overlap. Tetra Laval’s dominance in the carton market might therefore spill over into the associated PET market, through the acquisition of Sidel.

In dealing with the elimination of potential competition argument, the CFI did not accept that the Commission had demonstrated a significant or growing competition between carton and PET that was sufficient to establish the existence of potential competition.

In relation to the leveraging for "spillover" argument, the CFI found that that would only be possible to establish if an eventual PET substitute for carton, applied to Tetra Laval’s existing carton customers, could be seen as a distinct market. On the facts, the CFI concluded that there was no evidence to suggest that any PET demand by such customers could not be met by suppliers of all forms of PET packaging, such as those supplying carbonated soft drink and water manufacturers. In the CFI’s view the presence of such competition would act as a disincentive to Tetra Laval seeking to exploit such leverage as it had.

On 16 September 2002 the OFT reaffirmed its earlier decision of 16 July 2001 (press release 32/01) and fined Aberdeen Journals Limited ("AJL") € 1.328m for abusing a dominant market position in breach of the Chapter II prohibition.

The OFT decision found that AJL was guilty of predatory pricing when it sold advertising space in the Aberdeen Herald & Post at a loss with the intention of removing a rival from the market.

The earlier OFT decision found that Aberdeen Journals is dominant in the market for the supply of advertising space in local newspapers (paid for and free) within the Aberdeen area.

On appeal to the Competition Commission Appeals Tribunal ("CCAT"), this decision was set aside (as reported in our first newsletter), on the grounds that the market definition was not sufficiently reasoned. The CCAT referred the case back to the OFT.

After further analysis, the OFT has confirmed its original finding that the relevant market is the supply of advertising space in local newspapers within the Aberdeen area and reinstated the fine of € 1.328m. This was after a detailed review of the advertising market in Aberdeen. The OFT’s reasoning was based on the type of advertising medium that could be ‘substitutable’ for the service AJL provides.

The OFT said this fine reflected the ‘serious infringement of the Competition Act and should act as a deterrent to others’. This reflects the general position being set down by the OFT, which appears determined to be seen to be vigourously policing compliance with the Competition Act 1998.

The OFT has fined Hasbro £4.95 million pounds for anti-competitive price fixing in breach of the Chapter I prohibition. When renewing its agreement with distributors in early 2001, Hasbro prohibited distributors from making settlements, retrospective rebates or ordinary discounts on Hasbro listed products, thus keeping prices high and interfering with freedom to compete. This form of agreement continued until July 2001, when Hasbro informed distributors by letter that they no longer had to keep to its wholesale list prices.

The OFT has ruled that the agreements breached the Chapter I prohibition of the Competition Act 1998, concerning agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition within the UK. The maximum penalty for such infringement is up to 10% of the offending company's turnover, but Hasbro was granted a 45% reduction on the original £9 million fine under the OFT's leniency programme, since it had co-operated fully with the OFT investigations and had asked for leniency at an early stage. Nevertheless, Hasbro's penalty of £4.95 million is the largest imposed to date under the Competition Act.

Ten distributors escaped fines, as the OFT found that the price fixing was put in place at Hasbro's initiative and, due to their substantially weaker economic position, the distributors had little choice but to comply.

The Enterprise Act received Royal Assent on 7 November 2002. The majority of its provisions come into force in May 2003. As outlined in our previous newsletter, it will have a profound effect on the administration and enforcement of national competition law in the UK. The new provisions in the Act attracting the most attention include:

• Criminalisation of cartels

Following the lead of United States anti-trust law, the Enterprise Act creates a new criminal offence for persons who dishonestly agree that 2 or more undertakings will engage in any of the list of prohibited "hard-core" cartel activities, which include price-fixing, market sharing, limitation of production and bid-rigging. Such persons are liable to be punished by up to 5

years’ imprisonment or unlimited fines.

• Disqualification of directors involved in cartels

The Enterprise Act also provided for disqualification, for a period of up to 15 years, of directors who knew, or ought to have known, of cartel behaviour.

• Merger control

The Act changes the UK merger control regime by replacing the principal provisions of the Fair Trading Act 1973. The gross assets test will be replaced with a new turnover test. This new test will be met where the company being acquired has a UK turnover exceeding £45 million. The share of supply test will continue to be met where the combination of the purchaser and target's business leads to the merged entity controlling one quarter of the supply of goods or services in a relevant UK market. The system remains voluntary, so, where the tests are met, the parties can decide whether to notify the proposed (or completed) merger to the OFT.

The Act changes the substantive test for the assessment of mergers. It introduces a substantive lessening of competition test. This replaces the broader public interest test and heralds a new era of merger assessment based on competition economics. The test will be applied at both phases of a merger investigation, the OFT will apply the test in deciding whether to refer a merger to the Competition Commission for a phase two investigation. The CC will then apply the test to decide whether to clear the merger.

The Act depoliticises the merger control regime by removing the Secretary of State's power to make final merger decisions (except where national security or significant public interest considerations are raised). Upon a referral from the OFT, the CC will investigate and make a binding merger decision. As part of the process, the CC has been granted powers to address structural and/or behavioural remedies to the merging parties.

These changes are likely to come into force during Spring 2003 and until commencement the Fair Trading Act 1973 continues to apply.