Competition commission publishes its 2010 annual report and takes a stand on the increasing strength of the Swiss franc against the Euro and the Dollar
The Competition commission has published its 2010 annual report.1
According to the Competition commission, 2009 was a year for activities calculated to combat significant distortions of competition. In the case of horizontal agreements, special attention has been paid to the issue of bid rigging in the construction industry. As far as vertical agreements are concerned, the focus was (and still remains) on the foreclosure of the Swiss market by preventing parallel and direct imports. In a decision dated June 28 2010, the Competition commission modified its notice on the competition law treatment of vertical agreements to bring it in line with the most recent case law and developments in the EU. As a result, it has ensured that the same rules continue to be applied in Switzerland in relation to vertical agreements as apply in the EU and that the foreclosure of the Swiss markets can be prevented. The Competition commission is also endeavouring to raise awareness and thus encourage the use of the bonus programme, i.e. the opportunity to report a cartel voluntarily in return for relief from sanctions.
As regards merger control, the Competition commission has focused on concentrations that may be detrimental to competition in the Swiss market specifically. 2010 has been marked by the Sunrise/Orange case, in which the planned concentration between Sunrise (Tele Denmark Communications A/S) and Orange (France Télécom Group), two Swiss mobile network operators, was prohibited by the Competition commission. The Competition commission argued that the proposed concentration would have created a situation of collective dominance of the merged entity and the only other remaining operator, Swisscom, the incumbent telecommunications provider in Switzerland, in the retail market for mobile telecommunications services and in the wholesale market for access to mobile networks. This is only the second time that the Competition commission has prohibited a merger. The first prohibition (Berner Zeitung/20 Minuten case) was overturned by the appellate courts.
Among the main topics discussed in the 2010 annual report is the growth in international cartels that has resulted from increasing globalisation and which represents an important issue of concern for the Competition commission. The latter would like to facilitate their prosecution in Switzerland, notably through a closer cooperation between the Swiss competition authorities and their EU counterparts. In view of this, the Competition commission very much welcomed the decision of the Swiss government in August 2010 to approve a mandate to negotiate an agreement with the EU. The Competition commission is convinced that such a cooperation agreement will enable Switzerland to make a more important contribution to the prosecution of international cartels and that it would also be further evidence of Switzerland's credibility as a reliable partner in the prosecution of cartels, which has considerably increased in recent years.
In its 2010 annual report, the Competition commission also deals with an issue that gave rise in 2009 to a large number of enquiries to its Secretariat and a major public debate, namely the increasing strength of the Swiss franc against the Euro and the Dollar. The report presents a number of arguments, based on theory or practical observations, which might explain the incomplete (or not immediate) pass-through of changes in the exchange rate in Switzerland. For example, the cost reducing effect of a stronger Swiss franc is felt in many sectors only after a certain time and only where there are lasting exchange rate benefits, because the import of goods is first of all often based on long-term contractual arrangements that take account not of the current exchange rate but of a rate that was fixed in the past. Also, certain companies take hedging measures against foreign exchange risks. In these cases, change in exchanges rates has no immediate effects on procurement costs. In view of these circumstances, the report notes that the potential that the Competition commission has to intervene is limited, because the pass-through of currency benefits follows specific economic patterns, and these cannot be influenced by competition policy. What is conceivable, the Competition commission says, would be an arrangement between competitors not to pass on any exchange rate benefits to customers or consumers. An arrangement of this type would result in direct or indirect price fixing and would accordingly be presumed to remove effective competition. According to the report, a further scenario that would be relevant to competition law could arise if there is a vertical agreement on the non-pass through of exchange rate benefits in a sales network (e.g. between foreign producers/manufacturers and their national dealers). The Competition commission noted however that an arrangement of this type is not covered by the Competition Act if it is made within a group of companies. But it cannot be excluded that article 7 of the Competition Act (unlawful practice by a dominant undertaking) could come into play, notably in the case of vertically integrated company (a foreign producer/manufacturer with its own distribution network in Switzerland), which holds a dominant position in relation to its products.
It should finally be recalled that, on July 1 2010, Professor Vincent Martenet took over as President of the Competition commission from Professor Walter A. Stoffel. According to the new President, this change is very much a sign of continuity and should not impact on the way the Competition commission operates.
Competition commission opens investigation against Swatch Group
On June 6 2011 the Competition Commission opened an investigation into the Swatch Group. The investigation aims to determine whether the Swatch Group's decision to stop supplying competitors with certain watch components which are necessary for the manufacture of mechanical movements violates the Competition Act. The Swatch Group was aware that this project might be problematic from a competition point of view and therefore contacted the competition authorities. On the basis of a mutual agreement reached with Swatch Group, the commission ordered provisional measures to apply for the duration of the investigation. The purpose of these measures is to prevent long-lasting damage to competition occurring in the relevant markets.
In particular, the Swatch Group plans to stop supplying mechanical watch movements and assortments (ie, an assembly of linked parts that constitute the components regulating a mechanical watch) to third parties. The purpose of the investigation is to determine whether the Swatch Group's decision constitutes an abuse of its dominant position, thereby violating Swiss cartel law. More specifically, the commission must determine whether Swatch Group's competitors have alternative sources of supply of the components in question, and if so, what the timeframe for their integration would be.
The Swatch Group has shown itself willing to find an amicable settlement taking the form of a phased supply reduction. Thus, the commission's provisional measures provide, among other things, that the Swatch Group must initially continue to supply third parties. In 2012 the Swatch Group will be entitled to reduce the supply of mechanical watch movements to 85% of the quantities purchased in 2010, and to 95% as far as assortments are concerned.
A related investigation which began in September 2009 into the activity of ETA SA Manufacture Horlogère Suisse – a subsidiary of the Swatch Group – in relation to mechanical watch movements is likely to be heavily influenced by the conclusions of the new investigation. Therefore, the ETA investigation has been temporarily suspended.
Competition commissions launches investigation into the distribution of musical works in Switzerland
On June 6 2011, the Competition commission opened an investigation against the International Federation of the Phonographic Industry (IFPI-Switzerland) and its members. The latter are suspected of impeding parallel imports, preventing certain companies from becoming members of IFPI-Switzerland and establishing discriminatory rules regarding the elaboration of the Swiss Charts.
The preliminary investigation opened on March 24 2011 revealed indications that IFPI-Switzerland and its members could have implemented practices restricting parallel imports of certain musical products, such as compact discs (CDs). For that reason, the Competition commission decided to open an investigation, which shall also examine whether the conditions for joining this association and the rules for establishing the Swiss Charts are legally sound. Besides, the investigation will analyse the conditions of use of the phonograms and videograms management and distribution system named 'Music Promotion Network', which is being used by numerous radios to broadcast music.
The Secretariat of the Competition commission asks for sanctions against construction companies of the canton of Aargau
The Secretariat of the Competition commission proposes imposing fines for a total amount of about 7 million Swiss francs on several companies operating in the field of road building and civil engineering in the canton of Aargau for infringements of the Competition Act. This proposal submitted to the Competition commission comes as the result of an investigation launched in June 2009 on the basis of suspicions of collusive tendering. The investigation confirmed the indications that the companies involved had made illicit agreements to fix tender prices and allocate customers in relation to private and public tenders.
The Secretariat qualified the behaviour of the companies as amounting to illegal agreements on price fixing and market sharing. It thus makes the proposal that the Competition commission should adopt sanctions against the companies involved for breaches of the Competition Act. The fines recommended in the draft proposal of the Secretariat – ranging from about 5000 Swiss francs for the lowest one to approximately 2.3 million Swiss francs for the highest one – have been calculated according to the turnover of the undertakings and the seriousness of the violation of the Competition Act. Benefiting from the leniency program (bonus), five of the undertakings concerned were granted a fine reduction and one even avoided sanctions.
The undertakings involved can now submit their views on the Secretariat's proposal. The Competition commission will take its decision after receiving all the views of the parties involved in the proceeding and after conducting possible hearings.
Competition commission refuses concentration privilege to a joint venture between E Group and Swisscom in the fibre optic sector
The E Group and Swisscom plan to create a joint venture in the canton of Fribourg with the aim of building and operating a fibre optic network. The Competition commission concluded that the project was nothing more than cooperation between two undertakings. According to the Competition commission, the contemplated joint venture will not engage in commercial activities on an autonomous basis. As a result, a prior clearance by the Competition commission is not necessary. However, as for similar projects in other regions of Switzerland, some constituent elements of horizontal agreements have been singled out. The Secretariat of the Competition commission has thus decided to open a preliminary investigation.
In several regions of Switzerland, Swisscom is cooperating with energy distributors in order to create fibre optic networks. In the canton of Fribourg, Swisscom and the E Group decided to cooperate through the formation of a joint venture. The latter is supposed to ensure the creation and the widespread operation of the so-called 'last kilometer'.
Under Swiss competition law, corporate joint ventures are subject to merger control if the joint venture company exercises all the functions of an independent business entity on a lasting basis. If a joint venture company is newly formed by two or more undertakings, it is subject to merger control if, in addition to the above criteria, the business activities of at least one of the controlling shareholders are concentrated in it.
After having conducted an in-depth investigation of the proposed joint venture, the Competition commission reached the conclusion that the joint venture was not going to engage in autonomous commercial activities vis-à-vis its parent companies in the near future. The incorporation of the joint venture thus does not require the clearance of the Competition commission under the merger control regime. The parent companies, however, have to make sure that this cooperation shall not result in any unlawful restriction on effective competition. As part of its investigation into the proposed joint venture, the Secretariat of the Competition commission found that some provisions of the joint venture agreement between Swisscom and the E Group might raise competition concerns. The cooperation will be reviewed under the same legal rules as the other fibre optic network building projects in Switzerland.
Abuse of a dominant position
Federal Supreme Court overrules Swisscom's record fine of CHF 333 million
On April 11 2011, the Federal Supreme Court as last instance upheld an appeal by Swisscom, the incumbent telecommunications provider in Switzerland, against a decision of the Competition commission regarding allegedly illegal mobile termination charges and overruled the record fine of CHF 333 million imposed on Swisscom. The Federal Supreme Court confirmed the findings of the lower court, holding that Swisscom had not abused its dominant position in order to impose excessive termination charges, because it would have been up to the alternative providers to challenge the termination charges by requesting their determination by the Communication commission.
On February 5 2007, the Competition commission issued a decision assessing the fine against Swisscom Mobile AG (Swisscom) for abuse of dominant position in the market for mobile telecommunication termination at CHF 333 million. Swisscom, one of the three mobile telecommunication operators in Switzerland, was found to have abused it dominant position by imposing excessive termination charges on other service providers for the period April 1 2004 to May 31 2005. A call over the mobile communication network consists of origination, transit and termination; termination ensures that a call is forwarded to a particular connection, where it can be picked up by the relevant end consumer. In Switzerland, each telecommunication provider is required by law to terminate calls from other telecommunication providers into its own network. In line with the market determination as applied by the EU Competition commission, the Competition commission defined the relevant market for call termination as being limited to the operator making the charge. So by definition, Swisscom was found to have a dominant position in respect of termination charges to all its users. For the period under scrutiny, Swisscom had fixed the termination charges, billed to other telephone operators (who pass them on in one form or another to their own subscribers), at CHF 0.335 per minute. According to Swisscom, it applied the lowest call termination charges of the three operators. But Swisscom was by far the largest operator in terms of both subscribers and revenue. Termination charges are justified in part by reference to costs, and Swisscom enjoyed significant economies of scale advantages over its competitors. The fine of CHF 333 million was the second fine that the Competition commission had imposed since it received powers to punish competition law violations directly, in effect since April 1 2004. It was by far the largest of the two (and the highest ever imposed in Switzerland).
Swisscom appealed the decision of the Competition commission to the Federal Administrative Court. On February 24 2010, the Court confirmed that the determination of the relevant market and the Competition commission's finding of Swisscom's dominant position were justified. However, it quashed the imposition of the fine on the grounds that Swisscom had not abused its dominant position to charge excessive prices to alternative providers. Indeed, Swiss law permits alternative providers to request that the Communication commission make a cost-oriented determination of the mobile termination charges. Since neither Orange nor Sunrise decided to do so, Swisscom's termination fees cannot be deemed to have been enforced against contract partners within the meaning of Article 7(2)(c) of the Competition Act. According to the Court, such practices cannot be assessed under the remit of Article 7(2)(c) ACart, even if the control of prices is insufficient in the Telecommunications Act, as the Communication commission cannot investigate without a complaint from an operator.
The decision of the Federal Administrative Court was appealed by the Department of Public Affairs and by Swisscom. On April 11 2011, the Federal Supreme Court confirmed, in essence, the findings of the lower court. It considered that under the Swiss ex-post regulatory system, pursuant to which cost-oriented prices are determined only at the request of alternative providers in interconnection proceedings launched against the incumbent operator, Swisscom could not be deemed to have abused its dominant position in order to force excessive termination charges on the alternative providers. Also, the Federal Supreme Court found no prevailing interest in the Federal Administrative Court's holding that Swisscom had a dominant position in the terminating market.
The Federal Supreme Court's findings have been criticised, notably with the argument that the decision does not take into consideration the interests of consumers. According to analysts, the decision also shows the need for revision of the Swiss telecommunications regime.
On August 28 2008, the Competition commission, the Price Supervisor and the Communication commission had jointly called for the Swiss Government to introduce an efficient instrument for faster determination of the network access prices charged by Swiss telecom companies. The Telecommunications Act should be amended so as to allow the Communication commission to act not only on the basis of a complaint from a telecommunications service provider but also on its own initiative, if there are reasons for assuming that access conditions are discriminatory or not cost-based. This specific legislative proposal relates exclusively to determination of the access or interconnection prices paid between providers (i.e., wholesale level); it only concerns providers who are in a market-dominant position as a result of their network and who are thus able to obstruct competition even in downstream end user markets.
Revision of the Competition Act: new consultation process
On March 30 2011, the Swiss government opened a public consultation regarding the partial revision of the Competition Act, which is a complementary consultation to the one launched in 2010. This consultation follows a motion that was introduced in 2010 by MP Rolf Schweiger. The reasoning behind the motion is to improve compliance with the Competition Act by reducing administrative fines imposed on companies that have implemented high standard compliance programs in cases where their employees violate competition laws. The motion also proposes to directly sanction the individuals accountable for breaches of the competition rules.
In accordance with the Schweiger motion, the Swiss government is favourable to reducing fines for undertakings that have implemented effective programs of compliance with competition law. However, the Swiss government is still opposed to sanctions against officers or employees of such undertakings, who are accountable for a cartel agreement, as was proposed in the motion.
On this latter point, two variants are submitted for consultation: The first proposal (Variant A) provides for the persons involved to be partially or totally prevented, for a limited period of time, from working in one of the undertakings that took part in a cartel as well as for the seizure and confiscation of the proceeds resulting from the cartel agreement, whereas the second proposal (Variant B) provides for criminal sanctions, in the form of a financial penalty or even imprisonment for up to three years. In cases of voluntary reporting of restriction of competition by one of the undertakings involved, the latter shall benefit from a penalty exemption. In order to make sure that the leniency program currently in place remains efficient, the second variant (Variant B) provides for the possibility of extending the penalty exemption to officers and employees. A total exemption is however in conflict with the general principles governing criminal law, which is a further reason why the Swiss government is opposed to this second proposal (Variant B).
On July 10 2011, the Competition commission gave its written opinion on the above mentioned consultation. In short, the Competition commission rejected the Schweiger motion and therefore welcomed the position of the Swiss government. The main arguments put forward by the Competition commission were the following:
- The proposal of reducing administrative fines imposed to
companies that have implemented compliance programs should not be
introduced in the Competition Act, because such a reduction in
fines is already possible based on the Ordinance of March 12 2004
on Sanctions imposed for Unlawful Restraints of Competition. The
reduction in fines should be seen as a mere possibility for the
authorities rather than an obligation.
- The proposed prohibition to exercise a professional activity
(Variant A) should be seen as a last resort and therefore only
rarely be used, taking into account the difficulties to investigate
such cases and the serious consequences for individuals and
companies involved. Thus, the Competition commission is of the
opinion that this amendment of the Competition Act would contribute
little to a better enforcement of competition law.
- The seizure and confiscation of the proceeds resulting from
infringements of the competition rules (Variant A) look like
appropriate measures, but also difficult ones to implement in
- The introduction of criminal sanctions against individuals
(Variant B) and the fact that the criminal proceedings against
individuals should depend on the administrative proceedings against
the company are to be rejected according to the Competition
commission. The prosecution of individuals could lead to a lot of
confusion as to the responsibilities within the company, reducing
as a result the willingness of employees to cooperate and of the
company to voluntarily report infringements of the law. In
addition, the proceedings against the company would be massively
delayed and become a lot more expensive.
- Moreover, criminal sanctions would often be imposed on the
wrong persons, considering that it is usually the undertakings
rather than their employees who are benefiting from violations of
the competition laws. Finally, the timing is inappropriate since
the possibility of imposing sanctions against companies has not yet
been fully exploited.
Balancing the sanction mechanism and making it more efficient, as required by the Schweiger motion, was not the subject of the first consultation process, which ran from the end of June to the end of November 2010. It may be recalled that the key elements of the partial revision project presented in summer 2010 consist in an effort to strengthen the competition institutions in order to reinforce the rule of law. The previous consultation also contained material improvements to strengthen the principle of competition to serve the general economic interest. Among other improvements, it is proposed that the legal presumption of illicit practice in case of minimum or fixed price setting or allocation of absolute territorial protection (as currently set forth in Article 5(4) of the Competition Act) should be abandoned; a case by case analysis would avoid market foreclosure, without impeding the implementation of economically legitimate distribution agreements. As regards concentrations, the Swiss merger control regime should be strengthened and simplified: on the one hand, the criteria to assess mergers should be strengthened to avoid harmful concentrations of the market; on the other hand, there should be an administrative simplification to reduce multiple examinations of international concentrations.
1. The annual report is available in English at the following address: http://www.weko.admin.ch/dokumentation/00226/index.html?lang=en.
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