UK: SJ Berwin´s Community Week: A Weekly Summary Of Competition Law And Policy Developments Issue 431 - 10 July 2009

Last Updated: 16 July 2009
Article by SJ Berwin's EU & Competition Team

EU DEVELOPMENTS

European Commission imposes billion Euro fine for the third time in one year

On 8 July 2009 the European Commission (the "Commission") imposed a fine totalling just over €1 billion on E.ON AG (and its subsidiary Ruhrgas AG) ("Ruhrgas"), and GDF Suez SA ("GDF Suez") for market-sharing in the French and German gas markets. The Commission's decision relates to an agreement between Ruhrgas and Gaz de France ("GDF") (which merged with Suez in 2008) dating back to 1975 when the parties jointly built the MEGAL pipeline to transports gas across southern Germany. At that time the parties explicitly stated in a series of letters that they agreed not to sell gas transported through the pipeline in each other's home territories, such that GDF would not sell gas in Germany, and Ruhrgas would refrain from selling gas in France.

At the time of the agreement both parties operated effective monopolies in their respective home countries, GDF through a legal monopoly and Ruhrgas through a system of 'demarcation agreements' which protected it from competition. Despite the European gas market being liberalised in 2000, and demarcation agreements being deemed illegal in 1998, the parties continued to honour their market-sharing agreement until 2005.

The size of the fine, which is to be shared evenly between the parties, is intended to reflect the seriousness of the offence. The Commission stated that the fact that the parties were aware that their 1975 agreement fell foul of competition law and yet maintained their market-sharing agreement demonstrated a clear infringement of Article 81. This agreement also allowed the parties to retain extremely strong positions in their respective gas markets during the liberalisation of the markets and thus deprived consumers of the very price competition that liberalisation was designed to encourage. Further, continuous contact between the parties confirmed the existence of a single continuous anti-competitive market sharing infringement since 1999.

This is the first Commission decision imposing fines in the energy sector for a breach of Article 81 or 82, although the Commission has recently demonstrated a strong interest in the sector. For example, on the same day as the GDF Suez and Ruhrgas fines were announced, the Commission published a set of commitments from GDF Suez on its website for market testing in separate proceedings. These commitments are designed to address concerns that GDF Suez, as the dominant gas supplier in France, may have prevented competitors for entering the market through its long term reservation of most of France's gas import infrastructure. Although GDF Suez has made no admissions of wrong-doing, the commitments will lead to the immediate release of a large proportion of its long-term reservations, with an eventual reduction of its share of these reservations to below 50%. Public consultation on these commitments is open for the next two months.

These two cases demonstrate the Commission's current determination to ensure effective competition in the European energy sector and as such the fines levied this week may not be the last significant penalties in this area.

European Commission begins Phase II investigation into Lufthansa's proposed acquisition of Austrian Airlines

The Commission has launched a Phase II investigation (under Article 6(1)(c) of the EC Merger Regulation) into the potential effects of Lufthansa's acquisition of Austrian Airlines. This is only the fourth Phase II investigation launched since the beginning of 2009.

The Commission made the announcement on 1 July 2009, following a finding in its Phase I investigation that the proposed merger could have a negative impact on consumer choice and lead to an increase in fares on routes from Vienna to Frankfurt, Munich, Stuttgart, Cologne, Zurich, Geneva and Brussels. Lufthansa had proposed remedies in order to prevent further investigation, however the Commission considered that these measures would not address all of the competition concerns identified by the Phase I investigation.

The Competition Commissioner Neelie Kroes stated that there were 'serious concerns' over the implications that the merger could have for passengers. Lufthansa is Germany's largest airline and controls Swiss Air, based at Zurich airport, Air Dolomiti, Eurowings and Germanwings, in addition to being a leading member of the Star Alliance. Austrian Airlines is itself the largest airline in Austria. The Commission recently approved Lufthansa's proposed acquisition of British Midland, on 14 May 2009, and conditionally approved an acquisition of Brussels Airlines on 22 June 2009.

The Commission has a deadline of 6 November 2009 to make its final decision, although Lufthansa has stated that it may walk away from the takeover deal if the decision has not been reached by the end of July. The Commission has already stated it hopes the decision would be reached swiftly 'in a spirit of mutual cooperation' with Lufthansa.

The Commission must also decide, as part of a separate investigation, whether to approve state aid for Austrian Airlines set at 500 million euros, which forms one of the conditions of the acquisition by Lufthansa.

Pharmaceutical sector inquiry indicates competition concerns in the market

In January 2008 the European Commission (the "Commission") initiated a sector inquiry into the European pharmaceutical industry in an effort to identify and address key competition concerns in the market by launching a series of dawn raids ) see Community Week issue 356). The inquiry focused on prescription medicines for human use and, in particular, the competitive relationships between originator companies and generic pharmaceutical companies, and that between originator companies themselves. A preliminary report was published in November 2008 ) see Community Week issue 401) and the final report, published on 8 July 2009, built upon the 70 or so submissions received from interested stakeholders in response to the report.

Regarding the relationship between originator and generic companies, the Commission identified a number of restrictive practices instituted by originator companies which delay or prevent the timely entry of generic products into the market. These practices include strategies to extend the life of patent protection, for example by the filing of patent clusters for a single product, using patent litigation in an effort to create obstacles and delays for generic companies, entering into settlement agreements with generic companies and the introduction of follow-on products. The Commission expressed particular concern about settlements involving direct payment from originators to the generic companies and restricting generic companies' ability to market the relevant product.

The Commission also identified competition concerns in relation to the relationships between competing originator companies, such as obstructive patent litigation and patent strategies that result in the prevention of new products from entering the market.

The Commission also put forward various proposals for changes to the regulatory system, which it recognised can be a cause of delay for generic entry. In particular the Commission called for the establishment of a Community Patent and a unified European patent litigation system. The Commission also noted that although Intellectual Property Rights are essential to the pharmaceutical market, they are subject to competition law and must not have as their object or effect the restriction of competition. This is particularly relevant to settlement agreements.

The publication of this sector inquiry has been awaited with anticipation by regulators and industry alike. The report makes it clear that the Commission has significant concerns about the operation of the pharmaceutical market and will hasten to intervene in any anti-competitive practices. If any further proof of the Commission's intentions to step up enforcement action in this area were needed, on the same day as the publication of the report, the Commission announced that it has initiated Article 81 and 82 proceedings against Les Laboratoires Servier and a number of generic companies for alleged anti-competitive practices.

UK DEVELOPMENTS

OFT to review supply of high cost consumer credit

The Office of Fair Trading (the "OFT") has announced that it is launching a review into the supply of high cost credit as part of its Financial Services Strategy (the "Review"). This sector is estimated to be worth £35 billion annually and is characterised by short-term, often small, loans with high annual percentage rates ("APRs"). Many customers of products in the sector are on low incomes with limited access to credit and a limited choice of product. They thus represent a vulnerable consumer group, whose position may be weakened further due to the current recession, which the OFT thinks is likely to increase the number of consumers seeking high cost credit.

The Review will focus on the level and nature of competition among product suppliers in the sector, taking account of the impact of the economic downturn on competition and whether suppliers compete in a way which is beneficial to customers. The Review will also look at the business models of lenders within the sector and their implications for competition, as well as comparing lending practices in the UK with those of other countries.

Furthermore, the Review will investigate the behaviour and decisions made by consumers when purchasing credit, whether information required to make well-judged decisions is available, and whether consumers have been afforded an appropriate level of protection. The Review also aims to quantify any consumer detriment found in relation to high cost credit. If this is significant, the OFT may consider suggesting appropriate remedies to the Government.

The credit industry, consumer organisations, parts of Government and independent experts will all be asked to input into the Review. The OFT says that it expects to publish interim findings by the end of 2009, with the final report available in Spring 2010.

GERMAN DEVELOPMENTS

German Federal Cartel Office fines pharmacists' associations for collective boycott

The German Federal Cartel Office ("BKartA") has imposed fines totalling approximately €1.2 million on four German pharmacists' associations (the Bundesvereinigung Deutscher Apothekerverbände ("ABDA"), the Landesapothekerverband Baden-Württemberg e.V., the Berliner Apotheker Verein e.V. and the Thüringer Apothekerverband e.V.) as well as on several individuals.

The BKartA found that the pharmacists' associations had repeatedly called on their members not to purchase products from Gehe, a pharmaceutical wholesaler, after Gehe's parent company Celesio had taken over DocMorris in April 2007. DocMorris offers its pharmaceutical services through a mail-order pharmacy and it offers a franchise-like brand partnership to pharmacists.

A collective boycott violates German competition law if it is made with the purpose of hindering a company unfairly, i.e. without an objective justification. As the boycott in this case was meant to harm Celesio/Gehe and ultimately protect the incumbent pharmacists from emerging competition, the BKartA saw no objective justification for the conduct.

At the time of the boycott, DocMorris was also operating a pharmacy outlet in Saarbrücken. The permit for the pharmacy outlet has since been withdrawn, following an ECJ ruling upholding the ban on third-party ownership of pharmacies under German law. In the event that the ECJ ruling had gone the other way, that would have opened the door to DocMorris owning strings of (DocMorris branded) pharmacies and it was mainly this prospect that inspired the collective boycott.

The orders imposing the fines are not yet final. The individuals and undertakings concerned can appeal against the decision.

FRENCH DEVELOPMENTS

French Competition Authority issues opinion on exclusive access to TV content granted to Internet Service Providers

On 7 July 2009 the French Competition Authority (the "Authority") gave its opinion on the exclusive rights granted to internet service providers in relation to television content. The Authority's opinion was given in response to a request from the French Minister of the Economy on 8 January 2009.

The Authority made some interesting suggestions in relation to the pay-TV sector and particularly the model implemented by the telecom operator Orange, which benefits from a "double exclusivity", involving exclusive rights to television content and exclusive rights in relation to the transport and access services to this content via the internet.

The Authority considered that, although such exclusive rights provide an incentive to operators to invest in television, they are restrictive for the consumer and should only be permitted in exceptional situations. Thus, the Authority proposed limiting the exclusive access for a short period of one or two years, and only in cases of real technical and commercial innovation.

The Authority also proposed to allow the first exclusive internet service provider to sell its television content to other operators itself after expiry of the short period of exclusive rights. Otherwise, the Authority noted, the incentive for the first exclusive internet provider to invest in television content could disappear.

Finally, the Authority noted that clear rules should be defined to regulate the pay-TV sector in order to improve competition on this market, and specifically in the sport and movie television sub-sectors. The Authority thus called for such legislation to be considered.

The Authority's opinion is not binding but it can be influential.

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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