Copyright© 2010 WeComply, Inc. All rights reserved. 8/23/2015 EU Competition Law

Copyright© 2010 WeComply, Inc. All rights reserved.

04/19/23

EU Competition Law


04/19/23

EU Competition Law

Copyright© 2010 WeComply, Inc. All rights reserved. 3

Introduction to the European Union

Background information on EU institutions:

•EU consists of 27 Member States

•EU and three other countries are part of European Economic Area (EEA) EU competition law applies to all countries in the EEA


EU Institutions

EU Institutions:

•European Commission

•European Parliament

•Council of Ministers

Commission enforces competition policy through directorate general (DG)

•Can launch surprise investigations at company premises

•Can require large mergers to be approved EU Member States have their own competition laws and authorities Companies must comply with competition laws of EU and Member States


Enforcement of Competition Law

We require strict compliance with laws of any country in which we do business

Competition law enforcement is Commission’s top priority

•DG Competition actively enforces rules in Treaty on the Functioning of the European Union (TFEU)

• Violators take a huge risk of being investigated and sanctioned Companies must comply with competition laws of EU and Member States


In the news…


Consequences of Non-Compliance

Non-compliance has serious consequences:

•Fines up to 10% of annual worldwide turnover

•Liability in damages under national law

•Voiding of contract

•Criminal liability

•Substantial expenditure of time and money

•Bad publicity

•Investigations by other competition authorities


Consequences of Non-Compliance (cont’d)







•Bad publicity










•Bad publicity










•Bad publicity



Overview of EU Competition Law

Aspects of primary importance to business:

•Article 101 TFEU makes illegal any agreement or concerted practice between undertakings that significantly restricts competition within EEA

•Article 102 TFEU makes it illegal for dominant company to abuse its dominant position in market

EU competition law deals with anti-competitive agreements between companies and unilateral conduct of individual companies with dominant position


Overview of EU Competition Law (cont’d)

Aspects of primary importance to business:

•Article 101 TFEU makes illegal any agreement or concerted practice between undertakings that significantly restricts competition within EEA

•Article 102 TFEU makes it illegal for dominant company to abuse its dominant position in market

EU competition law deals with anti-competitive agreements between companies and unilateral conduct of individual companies with dominant position


Article 101 TFEU: Purpose and Rationale

Article 101 prohibits agreements that disrupt free-market principles and hinder competitiveness

Article 101 promotes independent decision-making over -

•Pricing

•Whether to sell in one country or several

Decisions should be based on desire to attract new customers and retain existing ones Agreements that restrict two or more companies’ commercial options are likely to violate Article 101


What Is an Anti-Competitive Agreement?

For conduct to be prohibited under Article 101(1):

•There must be agreement, decision or concerted practice

•Agreement must involve more than one undertaking

•Agreement must have as its object or effect the restriction of competition

•Agreement must affect trade between EU Member States

If any one element is missing, there is no restriction of competition

Agreement where restrictions on competition are outweighed by positive economic effects may be exempt


What Is an Anti-Competitive Agreement? (cont’d)

For conduct to be prohibited under Article 101(1):

•There must be agreement, decision or concerted practice

•Agreement must involve more than one undertaking

•Agreement must have as its object or effect the restriction of competition

•Agreement must affect trade between EU Member States

If any one element is missing, there is no restriction of competition

Agreement where restrictions on competition are outweighed by positive economic effects may be exempt


Consequences of Article 101 Violation

Anti-competitive agreement is legally void and unenforceable

Consequences:

•It can totally disrupt commercial relationships – e.g., where agreement is basis of core business functions

•It can also attract substantial fines and lawsuits


Recognising "Red Flags"

Competition law issues typically arise in these contexts:

1.Relationships with competitors

2.Relationships with customers

3.Relationships with licensees

4.Behavior of a dominant company

5.Internal filing and drafting documents


Relationships with Competitors

Relationships with competitors pose highest risk

Keep in mind:

•Be aware of competition laws when speaking or dealing with a competitor

•Meeting/talking with competitor may raise inference of agreement to restrain competition

•Competitor contacts receive utmost scrutiny from authorities

Inform the Legal Department of any contacts that you are planning to have with competitors


Cartels

Cartel: An arrangement between competing firms designed to limit or eliminate competition between them Cartels are harmful because they enable participants to charge higher prices than in competitive market

Cartels are most serious infringement of EU competition law Cartel behavior can lead to extremely high fines and criminal sanctions Most common types of cartels are price-fixing, market-sharing, output limitation and bid-rigging


Red Flag: Price-Fixing

Agreement between competitors on pricing is almost always illegal Price-fixing is prohibited in both horizontal and vertical relationships

Agreement between competitors to set minimum prices is blatant price-fixing

Indirect agreements may also be illegal, e.g. to –

•Compare price lists before publication

•Exchange detailed information on each other’s production costs

•Agree on any other term of sale


Red Flag: Price-Fixing (cont’d)

Agreement between competitors on pricing is almost always illegal Price-fixing is prohibited in both horizontal and vertical relationships

Agreement between competitors to set minimum prices is blatant price-fixing

Indirect agreements may also be illegal, e.g. to –

•Compare price lists before publication

•Exchange detailed information on each other’s production costs

•Agree on any other term of sale


Pop Quiz!

Three companies dealing in lawn-mowers, a Belgian, Dutch and German company, agree that their customers will only be offered 15 days of credit instead of the normal 90 days of credit. Are these companies infringing on Article 101?

A.Yes.

B.No.


Red Flag: Market-Sharing

Market-sharing: Agreement between competitors to divide up customers or geographical areas where they will not compete against each other Agreement to limit one competitor’s attempts to make sales is almost certain to be illegal

Market-sharing in EU is particularly serious because it isolates geographical markets and hinders integration of EU countries into a single market


Red Flag: Limiting Output

Cartel may enable price increases (or prevent reductions) by restricting production

•Agreements typically involve quota system of output allocations

•One company may agree to stop producing one product in exchange for other company stopping production of another product

These agreements are serious violations and not likely to obtain exemption


Pop Quiz!

The most important worldwide producers of chips for mobile phones are worried about serious over-capacity in the industry, which is reducing their profit margins. In fact, most producers are selling chips at a loss. The CEOs of these companies meet at a luxury spa resort just outside Bangkok in order to find a solution to their mutual problem. Instead of agreeing on specific quotas, which they believe will be very hard to monitor and enforce, they orally agree to shut down a number of production plants across Europe over a period of two years. They also agree to immediately reduce their production time by three hours a day and to refrain from investing in additional production capacity.

Are the chip producers infringing Article 101?

A.Yes.

B.No.


Red Flag: Bid-Rigging

Bid-rigging: Agreement amongst competitors to collaborate over their response to invitations to tender

Typically, colluding companies agree which company will win current tender

• Next time there is a tender, another company will win, etc. Bid-rigging is a very serious cartel offense


Red Flag: Information-Sharing

Competitors sometimes agree to exchange or share information Some information-sharing is legal and enhances competition

Sharing confidential business information is serious violation, e.g. –

•Information on prices, rebates and other price-related information

•Production or distribution costs

•Forecast capacity

•Investment plans Content of information is decisive factor – not medium of exchange


Pop Quiz!

The four members of the German trade organization for manufacturers of trucks agree to set up an information-exchange system to monitor sales of trucks in Germany and Austria. The trade organization designs a specific form to be filled out by manufacturers’ dealers every time the sale of a truck is registered. The dealer form contains information on the brand, the location of the dealer and the value of the sale. The trade organization compiles the information and provides it in a monthly report to the members. The information made available to the members identifies each individual member’s sales in different regions of Germany and Austria and provides a calculation of each member’s market share.

Is the behaviour of the truck manufacturers or trade association infringing Article 101?

A.Only the truck manufacturers.

B.Only the trade association.

C.Yes, both.

D.No, neither.


Other Agreements with Competitors

Consider competition rules before making any agreement with a competitor

Some agreements between competitors are good for or neutral to competition, e.g. –

•To cooperate on R&D projects

• To pool resources for production and/or purchasing advantages

• To cooperate in commercialization of products

• To set industry standards Full analysis of economic/legal context is needed to determine legality


Vertical Agreements (cont’d)

Vertical agreements: Agreements between companies of differing trade levels We may choose our own customers or suppliers, so long as we do so independently Only vertical agreements that include hardcore restrictions (e.g., price-fixing or market-sharing) are prohibited Block Exemption Regulation on Vertical Agreements (Verticals BER) is a guide

Always have the Legal Department review business arrangements that raise any red flags


Verticals Block Exemption Regulation

Set rules for vertical agreement exemptions If agreement falls within Verticals BER, parties can generally be sure that it is legal

Some clauses are never exempt:

•Resale price maintenance

• Market-partitioning or absolute territorial restrictions on distributors

• Restrictions on a producer’s ability to sell spare parts

• Non-compete clauses lasting more than five years

• Post-termination clauses lasting more than one year

• Certain requirement contracts


Pop Quiz!

Choco-ice has a market share of 25% of the ice cream market in the United Kingdom. It requires its retailers to buy 90% of their ice cream needs for eight years. It this clause exempted by the Verticals BER?

A.Yes.

B.No.


Red Flag: Resale Price Maintenance

Resale price maintenance: Agreement between suppliers and distributors and/or retailers on how much they may charge their customers Commission has imposed substantial fines

Setting recommended prices or maximum sales prices is generally not illegal if manufacturer allows distributor/retailer to determine price


Pop Quiz!

A large publisher of children’s story books, Books R Us, has a range of distributors in each EU country. It informs its distributors of a recommended sales price for its books. When several distributors sell Books R Us’s books at discounted prices in Germany because it is national reading week, Books R Us does not react.

Is Books R Us infringing Article 101?

A.Yes.

B.No.


Red Flag: Market-Partitioning

Market-sharing agreements between competitors are illegal

Market-sharing agreements may also be vertical – i.e., between suppliers and their distributors

•Producers may restrict distributors from selling outside an allocated territory

• Producers may not prevent distributors from responding to unsolicited orders from customers outside designated territory

Commission has imposed large fines on distributors that took steps to prevent trade from one EU Member State to another


Red Flag: Market-Partitioning (cont’d)

Market-sharing agreements between competitors are illegal

Market-sharing agreements may also be vertical – i.e., between suppliers and their distributors

•Producers may restrict distributors from selling outside an allocated territory

• Producers may not prevent distributors from responding to unsolicited orders from customers outside designated territory

Commission has imposed large fines on distributors that took steps to prevent trade from one EU Member State to another


Pop Quiz!

Teleco manufactures televisions that it sells through its distributors. It has a market share of 25%. It enters into a series of contracts where it grants exclusive distribution agreements to distributors in each EU Member State. It prevents the distributors from selling actively into each other’s territories but allows passive sales. Is this exempted by the Verticals BER?

A.Yes.

B.No.


Relationships with Licensees

Technology Transfer BER applies to transfers of intellectual property rights – e.g., patents, know-how and software copyright

It creates safe harbor for certain licensing agreements:

1. Agreements between competitors where combined market share of parties does not exceed 20%

2. Agreements between non-competitors where market share of each party does not exceed 30%

Agreements falling under Technology Transfer BER will be exempt from EU

competition rules


Relationships with Licensees

Technology Transfer BER will not apply if agreement contains -

• Price-fixing or resale price maintenance

• Most output limitations and customer allocations

• Restrictions on a licensee's ability to exploit its own technology or do R&D

These clauses will be considered illegal:

• Requirement that improvements be licensed back to IPR holder

• Obligation not to challenge validity of IPR

• Agreement between non-competitors limiting licensee’s ability to exploit its own technology or do R&D


Pop Quiz!

Compusoft has a computer technology for providing electronic maps in cars. It has a market share of 25%. It licenses its technology to Fastcar (a non-competitor) to put in their vehicles. Is this agreement exempt?

A.Yes.

B.No.

C.It Depends.


Article 82 EC: Abuse of Market Dominance

Article 102 is a companion of Article 101

•Directed at unilateral conduct of companies dominant in their market

•Targets abuse of dominant position

Abuse of a dominant position: Anti-competitive business practice undertaken to maintain or increase market position

•Includes unfair pricing, restriction of production output, and imposing discriminatory terms on trading partners Violations of Article 102 can result in serious fines and other penalties


Article 82 EC: Abuse of Market Dominance (cont’d)

Article 102 is a companion of Article 101

•Directed at unilateral conduct of companies dominant in their market

•Targets abuse of dominant position

Abuse of a dominant position: Anti-competitive business practice undertaken to maintain or increase market position

•Includes unfair pricing, restriction of production output, and imposing discriminatory terms on trading partners Violations of Article 102 can result in serious fines and other penalties


What Is a Dominant Position?

Dominant company has economic strength to behave independently of its competitors, customers and consumers Company with market share under 30% is not dominant Company market share of more than 40% is generally considered dominant

Between 30% and 40%, question of dominance depends on other factors, e.g. –•General competitive outlook of market structure•Number of competitors in market Market share over 50% generally creates legal presumption of dominance


What Is a Dominant Position? (cont’d)

Dominant company has economic strength to behave independently of its competitors, customers and consumers Company with market share under 30% is not dominant Company market share of more than 40% is generally considered dominant

Between 30% and 40%, question of dominance depends on other factors, e.g. –•General competitive outlook of market structure•Number of competitors in market Market share over 50% generally creates legal presumption of dominance


In the news…


Market Dominance Red Flags

Red Flag: Tying

• Dominant company may not make sale of one product conditional on purchase of another unless objectively justified

• Company may not use dominance in tying market on tied market

• Tying is prohibited even when apparently beneficial to consumers

Red Flag: Loyalty Discounts

• Dominant company may not offer its customers special discounts to discourage alternatives

• Any discount arrangement must be based on fair grounds


Market Dominance Red Flags (cont’d)

Red Flag: Tying

• Dominant company may not make sale of one product conditional on purchase of another unless objectively justified

• Company may not use dominance in tying market on tied market

• Tying is prohibited even when apparently beneficial to consumers

Red Flag: Loyalty Discounts

• Dominant company may not offer its customers special discounts to discourage alternatives

• Any discount arrangement must be based on fair grounds



Red Flag: Exclusivity

• Dominant company may not force customers to purchase all/most of their requirements from it

Red Flag: Refusal To Supply

• Dominant company must supply everyone, absent non-discriminatory and objectively justified criteria for it not to do so

• Can apply to supplying a competitor

Red Flag: Long-Term Agreements

• Dominant company’s entrance into long-term, no-termination contracts can be abuse of dominance



Red Flag: Exclusivity

• Dominant company may not force customers to purchase all/most of their requirements from it

Red Flag: Refusal To Supply

• Dominant company must supply everyone, absent non-discriminatory and objectively justified criteria for it not to do so

• Can apply to supplying a competitor

Red Flag: Long-Term Agreements

• Dominant company’s entrance into long-term, no-termination contracts can be abuse of dominance



Red Flag: Discriminatory Business Terms

• Dominant company may not discriminate amongst customers, absent fair and objectively justified grounds

Red Flag: Predatory Pricing

• Dominant company may not sell products at prices below cost to drive competitors out of business

Red Flag: "English Clauses"

• English Clause: Agreement between dominant company and customer that customer will not accept offer from another supplier until dominant company has declined to match it



Red Flag: Discriminatory Business Terms

• Dominant company may not discriminate amongst customers, absent fair and objectively justified grounds

Red Flag: Predatory Pricing

• Dominant company may not sell products at prices below cost to drive competitors out of business

Red Flag: "English Clauses"

• English Clause: Agreement between dominant company and customer that customer will not accept offer from another supplier until dominant company has declined to match it


Pop Quiz!

SuperClean lowers the price of its household bleach product to a level where it is producing a loss. At the same time, it raises the price of its window-cleaning product, a market on which it is dominant. Two of SuperClean’s competitors on the household bleach market are forced out of that market. SuperClean subsequently raises the price of bleach to 10% above what it was originally charging. Which of the following red flags does SuperClean’s conduct signal?

A.Tying.

B.English Clause.

C.Predatory pricing.

D.Exclusivity arrangement.

E.Refusal to supply.


Investigation and Enforcement

Under Regulation 1/2003, Commission can -

•Enter and seal premises inside the EU

•Examine private homes and cars of personnel inside the EU

•Examine and copy companies' business documents

•Download from computers and copy email files

•Question individuals on site

•Impose fines for failure to cooperate with investigation


Investigation and Enforcement (cont’d)

Under Regulation 1/2003, Commission can -

•Enter and seal premises inside the EU

•Examine private homes and cars of personnel inside the EU

•Examine and copy companies' business documents

•Download from computers and copy email files

•Question individuals on site

•Impose fines for failure to cooperate with investigation


Investigation and Enforcement (cont’d)

Companies must comply with Commission inspection decisions and cooperate with inspectors Non-cooperation may lead to procedural fine or increase in amount of overall fine

On an individual level –

•Cooperate with Commission officials

•Don’t attempt to co0nceal or destroy documents Both company and personal liability are at stake


In the news…


"Dawn Raids"

Commission officials have power to conduct inspection visits Inspections can occur without any warning at any time

Survival tips:

•Cooperate, be friendly and stay alert

•Inform management, Legal Department and external counsel

•Ensure that search stays within its scope

•Don’t destroy documents while investigation is going on

•Keep accurate minutes


"Dawn Raids" – Documents (cont’d)

We may not be legally required to hand over all requested documents Communications with external counsel are protected by legal professional privilege

If Commission officials request privileged documents from you –

• Refuse to provide documents based on attorney-client privilege

• If officials insist, request that documents be placed in sealed envelope until legal status can be ascertained


"Dawn Raids" – Documents (cont’d)

We may not be legally required to hand over all requested documents Communications with external counsel are protected by legal professional privilege

If Commission officials request privileged documents from you –

• Refuse to provide documents based on attorney-client privilege

• If officials insist, request that documents be placed in sealed envelope until legal status can be ascertained


Enforcement - Leniency Programme

Companies can apply for more lenient treatment by “confessing” to Commission This encourages cartel parties to “blow whistle” on cartel activities/members

First party to confess may receive 100% reduction from any fine Other parties who confess may receive significant reductions, but much less than first whistleblower


Enforcement - Leniency Programme (cont’d)

If you participate in or learn of anticompetitive discussions –

•Competitor may disclose all your discussions, writings, etc., to competition authorities in exchange for leniency

o Do not trust any of your competitors!

• Report incident as soon as possible to management and/or Legal Department to give our company a chance to be first to apply for leniency

o Report it orally to avoid creating documents that could be seized by competition authorities


Pop Quiz!

You are new to your job and realize that your predecessor was regularly exchanging prices with the company’s competitors. Which of the following presents your best course of action?

A.Continue your predecessor’s activities if it would be helpful for the company.

B.Stop exchanging prices with competitors and inform your Legal Department as quickly as possible.

C.Phone the authorities directly to report the conduct.


Careful Communication

Consider carefully your language in both internal and external communications

Ill-considered language can be very damaging

•It can make legal activity appear illegal

•It can colour authorities’ or complaining parties’ views as to intent Be careful with both written and oral communications

Competition law authorities are looking to careless statements in email as proof of anti-competitive conduct or intent


Careful Communication (cont’d)

Consider carefully your language in both internal and external communications

Ill-considered language can be very damaging

•It can make legal activity appear illegal

•It can colour authorities’ or complaining parties’ views as to intent Be careful with both written and oral communications

Competition law authorities are looking to careless statements in email as proof of anti-competitive conduct or intent


Rules for Written Communication

• Speak to in-house counsel before recording matters in sensitive areas

• Consider that what you record could be viewed by a third party – e.g., judge or regulator – in due course

• Don’t use “guilty” vocabulary

• Avoid speculation about legality/illegality of your conduct

• Don’t express your doubts in written communications


Pop Quiz!

Which of the following phrases would be appropriate in either internal or external communications?

A.To be destroyed after reading.

B.It has been agreed not to make any notes.

C.During the negotiations, the customer told me that our competitor’s price for this quarter is 200.

D.My source told me that our competitor’s price for this quarter is 200.


Rules for Multi-Party Agreements

• Avoid any suggestion that a collection of competitors has reached a view on a particular issue

• Do not record anything implying that prices are based on something other than the company's independent business judgment

• State clearly the source of any pricing information

• Ensure that you keep accurate records of all competitor contacts and review notes with Legal Department


Rules for Dominant Companies

• Avoid giving any customer the impression that it is getting special treatment

• Avoid –

o "This will enable us to dominate the market"

o "We have virtually eliminated the competition"

• Avoid suggesting that company has a strategy to drive out competitors


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Final Quiz


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Questions?


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Thank you for participating!

This course and the related materials were developed by WeComply, Inc. and the Association of Corporate Counsel.