European Union: European Competition Law Newsletter – January 2016

Last Updated: January 7 2016
Article by Matthew Hall

UK Supreme Court Defines a "Merger"

On 16 December 2015, the UK Supreme Court handed down a judgment on the definition of a merger for the purposes of UK merger control law. This issue is crucial for determining when the regulator may intervene under UK law and the case may also be of at least persuasive value when considering this issue in other jurisdictions.

This is a very long-running case concerning the acquisition of ferry assets operating on the Dover/Calais route on the English Channel between the UK and France. The assets, acquired following a liquidation procedure, included three vessels, trademarks, IT systems, goodwill and customer lists. After a seven-month break, the purchaser resumed ferry services using employees who had almost all worked for the previous operator. The re-employment of those employees had been incentivised by a statutory plan put in place by the former owner, by which it would provide payments to employers for employing the ex-employees.

The Supreme Court found that a business is subject to merger control if the capacity to perform its activities subsists. The test is one of economic continuity. An acquirer acquiring assets acquires a business where (i) those assets give the acquirer more than might have otherwise been acquired by going into the market and buying factors of production and (ii) the extra is attributable to the fact that the assets were previously employed in combination in the "activities" of the target business. The period of time between cessation of trading and acquisition of control of the assets may be a relevant factor, but is not necessarily decisive.

Applying this, the Supreme Court found that the purchaser in this case acquired substantially all the assets of the former operator and substantially the same personnel. This demonstrated "considerable continuity and momentum" and "the embers of an enterprise", which could be passed to the purchaser. A business was therefore transferred and a merger arose.

Alleged Abuse of Dominance Through Exclusivity Payments and Predatory Pricing

The European Commission (EC) has brought an unusual case concerning alleged abuse of dominance as a result of paying for exclusivity and selling below cost. This is of interest to any company which may be dominant in the EU or which purchases from or competes with such a company.

The allegations, set out in a Statement of Objections (SO) (preliminary statement of case) were sent to Qualcomm on 8 December 2015 and concern sales of its chipsets. The EC takes the view that the company may have illegally paid a major customer for exclusively using Qualcomm chipsets and sold chipsets below cost with the aim of forcing its competitor Icera out of the market.

The markets concerned, in which Qualcomm is allegedly dominant and therefore has a special responsibility not to restrict competition, are the worldwide markets for 3G (UMTS) and 4G (LTE) baseband chipsets.

In relation to the alleged exclusivity payments, the SO specifically alleges that since 2011, Qualcomm has paid significant amounts to a major smartphone and tablet manufacturer on condition that it exclusively use Qualcomm baseband chipsets in its smartphones and tablets. The EC takes the preliminary view that this conduct has reduced the manufacturer's incentives to source chipsets from Qualcomm's competitors and has harmed competition and innovation in the markets for UMTS and LTE baseband chipsets.

In relation to the alleged predatory pricing, specifically the SO takes the preliminary view that between 2009 and 2011 Qualcomm sold certain baseband chipsets at prices below costs, with the intention of hindering competition in the market. This conduct appears to have taken place at a time when Icera posed a growing threat to Qualcomm in the leading edge segment of the market, offering advanced data rate performance.

European Commission Publishes Latest Pharma Patent Settlement Survey, but Legal Position Still Unclear

The EC's latest report on pharmaceutical patent settlement agreements in the EEA (the EU plus three other countries), covering 2014, was published on 2 December 2015. The EC started these reports after its 2009 competition inquiry into the pharmaceutical sector, which identified settlements that limit generic entry and provide at the same time for a value transfer from the originator to the generic company as potentially raising competition concerns.

The headline finding in the report is that, as in previous years, the vast majority of pharmaceutical settlement agreements (some 88 percent this time) are prima facie unproblematic in competition law terms. The EC says this shows the industry's increased awareness of potentially problematic practices and that companies do not feel hindered from concluding settlements in general. This may or may not be the case, but in any event this area of law remains unclear despite these reports and two EC decisions concerning this issue.

In its June 2013 Lundbeck decision, the EC imposed a fine of EUR93.8 million on Danish pharmaceutical company Lundbeck and fines totalling EUR52.2 million on several producers of generic medicines for agreeing to delay the market entry of cheaper generic versions of citalopram, a blockbuster antidepressant. In July 2014, the EC imposed fines totalling EUR427.7 million on Servier and five producers of generic medicines for concluding a series of deals all aimed at protecting Servier's perindopril product from price competition by generics in the EU. This followed the expiry of Servier's principal patent for the perindopril molecule in 2003. Certain secondary patents had remained in force.

Both of those cases have been appealed to the EU General Court, and the correct legal position will not be known until the court opines. Meanwhile, legal uncertainty limits the appetite of originators and generics to negotiate patent settlement agreements and indeed probably reduces the likelihood that generic suppliers will challenge patents in the first place (which could in turn skew the findings of the EC's monitoring reports).

Although these cases and studies come from the pharmaceutical sector, similar issues would apply in any other sector. Companies are of course able to apply for patents, to enforce them, to transfer technologies and to settle litigation. However, competition law concerns may arise where such tools are misused.

European Commission Proceeds against Territorial Restrictions on Resale

The EC is keen to stamp down any measures which raise barriers to trade within the single market of the EU. This includes territorial restrictions on resale.

One species of such restrictions is those imposed by dominant suppliers on their customers, and in the past, the EC has proceeded against a number of energy suppliers which have used such terms. The most recent example is its case against Bulgarian Energy Holding (BEH), the incumbent state-owned, vertically integrated energy company in Bulgaria.

The EC announced on 10 December 2015 that it had resolved its concerns in a case involving BEH. The EC investigated clauses in electricity supply contracts concluded between BEH's production subsidiaries and third parties, such as traders, that imposed restrictions on where those third parties could resell electricity bought from BEH. The contracts also contained control and sanctioning mechanisms which allowed BEH to monitor and punish customers who failed to comply with these territorial restrictions.

To address the EC's concerns, BEH committed to offer certain volumes of electricity on an independently operated day-ahead market on a newly created power exchange in Bulgaria . Power exchanges ensure anonymous trading of electricity (i.e., the seller cannot trace the electricity it sells). This prevents the seller from enforcing territorial restrictions on resale. In addition to this and to ensure the liquidity of the exchange, BEH will offer minimum stipulated volumes of electricity on the Bulgarian power exchange, for a period of five years. The EC was therefore able to close the case without a formal finding of an infringement of EU competition law.

This case is of importance to dominant companies and customers of such companies in the EU, whatever the sector. Customers can protect themselves against dominant companies using such a provision in a number of ways, including initiating court action and making a complaint to the EC or a national competition regulator.

Additional European competition law news coverage can be found in our news section.

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