UK: SJ Berwin´s Community Week: A Weekly Summary Of Competition Law And Policy Developments Issue 430 3 July 2009

Last Updated: 6 July 2009
Article by SJ Berwin's EU & Competition Team

EU DEVELOPMENTS

Advocate General criticises CFI Reasoning In GlaxoSmithKline Parallel Imports Case

In 1998 GlaxoSmithKline ("GSK") introduced a dual pricing system in Spain with a view to deterring parallel trade.  Intermediaries in Spain were offered different prices for pharmaceutical products, depending on whether they intended to sell the products within Spain or to other EEA countries, with higher prices charged for export products. 

In May 2000 the European Commission ("Commission") determined that this dual pricing system infringed Article 81 EC by both object and effect, and that GSK had failed to establish that it met the requirements for exemption under Article 81(3) (specifically failure to prove a contribution to the promotion of technical progress).  GSK challenged the Commission's decision on a number of grounds. 

On appeal, the Court of First Instance ("CFI") agreed with the Commission that the system restricted competition by effect, but considered that the Commission had failed to prove an anti-competitive object.  It also annulled part of the decision on the basis that the Commission had failed to provide adequate reasoning in relation to GSK's submissions for exemption ( see Community Week issue 292).  Appeals to the European Court of Justice ("ECJ") were subsequently brought (on varying grounds) by GSK, the Commission, and two trade associations. 

The Advocate General ("AG") has now given her opinion.  Firstly the AG heavily critisises the CFI's approach to object based restrictions. The CFI had held that in order to assume an infringement by object, it must be possible to presume that final consumers will suffer.  The AG disagreed with this - finding that no analysis of the disadvantages for final consumers was required.  She considered that such an analysis was something to be taken into account when considering the application of Article 81(3), not before.  As such she concluded that the Commission had correctly found that that the dual pricing system had the object of restricting competition on the basis that it sought to restrict parallel trade.

However the AG supported the CFI's finding that the Commission did not adequately examine GSK's submissions in relation to Article 81(3).  She held that if a party supports an argument in a detailed manner, then the Commission may not refute such arguments in general terms.  In this case, GSK's submissions were supported by relevant economic and econometric data and the AG considered that the Commission should have dealt with them more extensively and in more detail.

AG opinions are not binding upon the ECJ and as such it remains to be seen whether these recommendations will be followed by the Court.  If the recommendations are followed, the focus of the debate as to whether dual pricing systems are legal under competition law is likely to shift to consideration of whether the conditions of Article 81(3) are met.  In particular whether, as argued in this case, such a system will enable greater R&D investment so as to offset the lost benefits of parallel trade.

Neelie Kroes Speaks On Restoring Long Term Viability To The UK Banking Sector

The European Competition Commissioner, Neelie Kroes, stated, in her recent speech to the British Bankers Association, that tough action will be needed in order to restructure and resurrect Europe's banks. The Commissioner upheld her belief that the European Commission (the "Commission") should "follow its tried and tested state aid rules" such that restructuring should follow rescue aid with a view to reducing levels of state support. She stated that "the need for competitive market structures is stronger than ever" in order to restore long-term viability to the sector and warned that there was no money left for a second banking bailout.   

Since the so-called "credit crunch" started in the autumn of 2008, the established rules on state aid have come under strain. Under pressure from governments, the Commission has had to ensure competition is maintained in a market supported by multiple series of government bail-outs and nationalisations - going so far as to give the Competition Commissioner emergency powers to deal with such cases in a matter of days, rather than the usual number of weeks such approvals normally take to process. 

So far 70 state aid decisions in the banking sector have been made across Europe. Commissioner Kroes applauded the high levels of cooperation that had taken place between the governments, the banks and the Commission in order to process these decisions in such short time scales, a feature she hopes will continue. 

Looking forward, the Commissioner took the view that banks must be moved off state support in order to maintain a competitive single market and avoid possible distortions of competition.  She referred to Lloyds and RBS, two British banks part-owned by the British government, stating that they may well face "significant divestments" in their paths to full competitive health in order to limit their levels of state support. This approach would be in line with the Commission's approach in other jurisdictions, such as Germany.

As well as state aid enforcement, Commissioner Kroes also pushed for a culture change in the sector to assist in guarding against future problems.

UK DEVELOPMENTS

easyJet Challenge To CAA Decision On Gatwick Price Controls Dismissed

On 26 June 2009 the Administrative Court of the Royal Courts of Justice (the "Court") dismissed easyJet's claim that the Civil Aviation Authority (the "CAA") had made a legally flawed decision to raise maximum price controls at Gatwick airport. 

The CAA must conduct five yearly reviews for airport charges for airports, including Gatwick, designated by the Secretary of State under the Airport Act 1986.  The procedure for these reviews is set out in the Civil Aviation (Economic Regulation of Airports) Regulations 1986 (the "Regulation").  In particular, the CAA must: first, give proper consideration to recommendations from the Competition Commission (the "CC") as to the level of the price cap; and second, allow 30 days, after the publication of the CC's recommendations, for airlines and airline operators to make their own representations.  

The CAA's decision, published in March 2008, increased Gatwick's maximum price per passenger by 21% to £6.79 until 2013.  This price can rise by no more than RPI inflation plus 2% each year. 

This decision particularly affected easyJet for two reasons.  First, easyJet represents 25% of Gatwick Airport's passengers.  Second, the company's low cost business model, premised on charging customers the lowest possible prices, is more acutely affected by cost increases than those of its competitors.

easyJet brought an action to challenge the CAA's decision on the grounds that it was unfair and unlawful.   The company contended that while the procedure under the Regulation was followed, it was not given the opportunity to comment on further representations made to the CAA by airline operator, BAA.  These representations, which remarked upon the impact of Government policy on security costs, fed into the CAA's decision to raise the maximum price per passenger beyond what had been suggested by the CC.

The Court, which emphasised its reluctance to exercise judicial review powers over expert regulatory bodies, dismissed the claim entirely.  The Court reached this conclusion on the following grounds in particular:

  • there was no evidence that the late submission by BAA of the revised security costs was in bad faith;
  • the CCA's adoption of a "constructive engagement" process for a period of two months, through which BAA made its representation, went further than the requirements of the Regulation;
  • the final figure was actually 70% of what BAA had requested; 
  • no other airline has complained about the price rise; and
  • provided that the CAA's reasons are not irrational or unreasonable, there is no presumption that the CC's recommendations must be followed.  

The Court therefore found that the CAA had acted fairly and lawfully, undertaking the steps necessary to fulfil its function. easyJet has been granted leave to appeal.

OFT Jurisdictional And Procedural Mergers Guidance Published

On 30 June 2009 the Office of Fair Trading ("OFT") published the final version of its new jurisdictional and procedural guidance on mergers, replacing existing OFT guidance (in particular OFT 526).

The final version follows on from the OFT's draft guidance paper published in March 2008 (see issue 367 of Community Week) and aims to increase clarity and predictability.

There are a number of significant changes since the publication of the draft version including the following:

  • Definition of an enterprise: The Enterprise Act 2002 applies to "enterprises" ceasing to be distinct.  The OFT has amended the list of considerations it will take into account when assessing whether there is an enterprise - reducing the importance of a direct contract between the parties.  Instead it has placed greater focus on the effect of the merger looking particularly at any transfer of customer records, any transfer of employees under TUPE, and in particular any price premium paid that might indicate the transfer of goodwill. This final point will provide strong evidence of the transfer of an enterprise;
  • Material Influence: This section now takes into account the recent BSkyB / ITV Competition Appeal Tribunal judgment. The final guidance paper divides the issue of material influence into two key areas: shareholding and board representation.   A shareholding of more than 25 per cent in a target entity will lead to a presumption of material influence.  A shareholding of 15 per cent or more may still be investigated (the OFT may even investigate instances of smaller shareholding in exceptional circumstances).  The strength of board representation in influencing policy, especially cross-directorships, is seen by the OFT as a key factor that could give rise to material influence regardless of any shareholding; and
  • Fast track references: Exceptionally parties may wish for a merger to be fast tracked to in-depth investigation by Competition Commission ("CC").  Previously the OFT would need to go through all the usual procedural steps, however this is no longer required in instances where the parties accept that the test for a reference has been satisfied.  Mergers could proceed from formal notification to reference decision in as little as 10 working days.

Alongside these guidelines the OFT and CC are consulting on joint substantive assessment guidelines - the consultation period for which ends on 7 August 2009.  The OFT has further announced its intention to develop new guidance on exceptions to the duty to refer and undertakings in lieu.  A consultation on these is expected towards the end of 2009.

Ofwat Publishes Response To The Cave Review Of Competition And Innovation In Water Markets

On 25 June 2009, Ofwat published its response to the Government-commissioned Independent review of Competition and Innovation in the Water Markets in England and Wales (the "Cave Review"). The Cave Review put forward a number of recommendations in relation to improving competition in water markets in England and Wales. Ofwat's response to the key recommendations of the Cave Review are set out below.

  • Upstream Market Mechanisms: Ofwat supports the proposal to have a step-by-step approach to developing market mechanisms in upstream water and sewerage activities. Ofwat also supports the recommendation to reform the current combined supply licence for new entrants by creating new upstream licences for companies wishing, for example, to introduce water into a company's network, or to carry out sewage or sludge treatment or disposal. Ofwat states that it will need to consider what further value would be added by the Cave Review's proposal to introduce an 'economic purchasing obligation' to Ofwat's existing price review process.
  • Retail Services Market: Ofwat supports the staged approach suggested by the Cave Review to developing an effective water and sewerage retail services market for non-households by initially reducing the existing eligibility threshold to 5 mega litres and eventually allowing all non-household customers to choose their water supplier. Ofwat also agrees to the replacing of the costs principle in legislation with Ofwat determining access pricing rules and access prices and the provision of mandatory legal separation of the retail operations of water companies. Ofwat will publish advice on the appropriate size of water companies required to carry out such a legal separation.
  • Industry Structure: Ofwat supports the Cave Review's recommendation for introducing a new first stage test for considering water mergers under the special regime whereby Ofwat would advise the OFT on whether a merger should be referred to the Competition Commission.  However, Ofwat does not support either raising the special merger regime turnover threshold to £70 million from the existing £10 million or excluding monopoly household retailers from the special merger regime. Ofwat states that such an increase or exclusion of monopoly household retailers would result in a reduction of comparators for Ofwat's comparative regulation regime, ultimately leading to higher bills and lower protection for consumers.

The Ofwat response also deals with the Cave Review's recommendations on Abstraction and Discharge, New Appointments and Innovation. Ofwat largely agrees with these recommendations while pointing out certain areas in which further clarification is required (for example Ofwat requests further clarification on what a statutory duty placed upon it to promote innovation would entail).

The UK Government will begin official consultations later this year on the proposals made in the Cave Review.

GERMAN DEVELOPMENTS

German Court Significantly Reduces Cement Cartel Fines

A Düsseldorf appeals court (Oberlandesgericht) last week significantly reduced the fines imposed by Germany's Federal Cartel Office ("BKartA") on five cement companies.

The court nearly halved the total fines from the €649 million imposed initially by the BKartA in 2003 on the cement companies HeidelbergCement AG, Holcim (Deutschland) AG, Dyckerhoff AG, Lafarge Zement GmbH and Schwenk Zement KG.

The BKartA stated in its press release commenting on the judgment that it believes the reductions were mainly prompted by three reasons.

First, the fines imposed by the BKartA in 2003 were assessed with a particular focus on the profits gained from the anti-competitive conduct. After a thorough investigation and with assistance from an independent economist, the court re-assessed the profits gained by the companies and subsequently reduced the fines accordingly.  This was primarily because the independent economist's assessment of the possible loss was more cautious than the assessment undertaken by the BKartA in 2003.

Secondly, the fines were reduced to take into account the parties' extensive cooperation during the BKartA investigation.

Finally, to a more limited extent, certain assumptions on the facts of the case made by the BKartA to calculate the surplus could not be upheld on closer analysis.

HeidelbergCement, which received the biggest fine, said on Monday that it now had to pay €170 million instead of the €252 million that was initially imposed. For France's Lafarge, the world's largest cement maker, the fines were reduced from €86 million to €24 million, whereas Switzerland's Holcim, the second largest cement maker, had its fines reduced from €74 million to €14.6 million.  Dyckerhoff's fine was reduced from €95 million to €50 million and Schwenk's fine was roughly halved to €70 million.

HeidelbergCement has already appealed against the decision to the Federal Supreme Court (Bundesgerichtshof) as it considers an even higher reduction to be appropriate.  The other parties have until today to decide whether to contest the judgment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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