CMA decides that loyalty discounts in pharma sector not an administrative priority but may be in the future

The CMA has closed a competition investigation into alleged abuse of dominance through loyalty discounting in the pharmaceutical sector. The CMA has decided not to continue with its year-long investigation on the grounds that the case is not within its current administrative priorities.  However, it has been at pains to stress that this does not mean that such cases could not merit investigation in the future.

Loyalty-inducing rebates have been a difficult topic at the EU and national level.  Companies who are at risk of being found dominant and competitors who consider that they are prejudiced by the discounting practices of such firms may consider that the case was a missed opportunity for the CMA to establish a precedent.  The CMA said that the evidence it has obtained suggests that continuing with its investigation would have had a limited effect on consumer welfare.  

Public authorities have limited resources and cannot of course investigate every case to a conclusion.  The European Commission may also decline to investigate a case to a full decision on the basis of it not being an EU priority.  This does not mean that the authority is closing the case due to resource issues alone but that the issues raised are not considered by it to be a regulatory priority.  This can involve the situation where the evidence gathered does not suggest that there will be a successful outcome. 

The CMA has said that it examined the conduct at issue extensively, including through stakeholder meetings and information requests.  The company under investigation has not been named yet the investigation has not been without costs in terms of legal uncertainty and disruption in dealing with the ongoing scrutiny.   

The case comes as a reminder of the often finely balanced issues to consider in relation to loyalty rebates applied by dominant firms.  Many schemes are pro-competitive.  Others will require a more detailed assessment.  However, until a competition authority or court makes a definitive decision in this area there will remain uncertainty in seeking to defend such practices against a traditional form-based approach and notwithstanding the portent of a more economics-based approach in the European Commission’s priority guidance.

Statement regarding the CMA's decision to close an investigation into a suspected breach of competition law in the pharmaceutical sector on the grounds of administrative priority, 26 June 2015

Two acquitted in cartel offence prosecution

The Competition and Markets Authority has failed to prove that two individuals acted dishonestly in agreeing to rig bids to supply steel water tanks contrary to the cartel offence in section 188 Enterprise Act 2002.  The jury acquitted the two accused three weeks into a trial that was set down to last for eight weeks.  The CMA announced the charges in July 2014 in a case where another individual had already pleaded guilty to the cartel offence.  The failure to secure the further convictions again puts into the spotlight the challenges for the CMA and before it the OFT in bringing successful criminal cartel prosecutions under section 188.

It appears that the jury was unconvinced that the defendants had pursued excessive profits as opposed to a strategy of seeking to maintain a modest profit to fend off redundancies and bankruptcy at the competing companies.  They were not satisfied that the individuals acted dishonestly under the applicable test.  This was a case predating the changes to the law from 1 April 2014 which mean that there is no longer any requirement to prove dishonesty.  It seems that the case fell apart due to the jury’s reluctance to find that the conduct of two men trying to save jobs in challenging economic times was to be stigmatised as dishonest. 

The acquittal comes as a blow to the CMA at a time when it is seeking to establish a break from the past as a newly constituted authority and where the OFT’s track record - and notably the collapse of the case against four British Airways executives in 2010 – has been criticised.  The verdict reveals that however strong the case may be on paper the jury will be sensitive to the human dimension and the standards of ordinary people in judging what is dishonest. 

It should not go unnoticed that the CMA was able to secure an admission from one defendant in the related case and under the old law where the dishonesty test applied.  With the  burden on the prosecution now reduced, it should in principle be much easier for the CMA to bring a solid conviction in the future.  However, there are a number of cases in the pipeline that appear to relate to the old law.  It remains to be seen whether the CMA will drop those cases and move on with cases where the prosecution is relieved of the burden to prove dishonesty.

Source: CMA News release 24 June 2015

Court of Justice rules in Deutsche Bahn dawn raids appeal

The Court of Justice has delivered its judgment in Deutsche Bahn’s appeal against a General Court judgment that upheld European Commission decisions authorising dawn raids of Deutsche Bahn’s premises.  In March 2011, the Commission conducted unannounced inspections at Deutsche Bahn’s premises as part of an investigation into whether Deutsche Bahn had abused its dominant position contrary to Article 102 TFEU.  Deutsche Bahn launched various appeals challenging the inspection decisions and all measures taken in consequence.

The Court of Justice rejected Deutsche Bahn’s human rights challenges under Article 8 and 6(1) ECHR that the Commission's decisions infringed its fundamental rights to inviolability of premises and to an effective legal remedy due to the lack of prior judicial review of the inspection decisions. 
However, the Court of Justice found that the General Court had wrongly found that the Commission had not violated Deutsche Bahn’s rights of defence by informing its agents prior to the first raid about further suspicions of anticompetitive activity which were not within the scope of the decision authorising the first inspection.  The information that was gathered during the first inspection decision informed the Commission’s decision to launch a second and third inspection which were vitiated by the circumstances in which the information was gathered. Therefore, the Court annulled the second and third inspection decisions.

In dismissing Deutsche Bahn’s human rights challenges the Court has reasserted the legal basis of the Commission’s power to launch a dawn raid and contained in Article 20 of Regulation 1/2003.  The fact that the company can challenge an inspection decision after the fact was considered sufficient to safeguard the rights of defence.  Although the Commission’s procedures may not correspond in all respects to the components of Article 6, the ECtHR confirmed in the Menarini  judgment that the Italian institutional framework - which is very similar to that of the EU - is adequate.  It stated that fines may be imposed by an administrative body the procedures of which may not necessarily comply in all respects with the requirements of Article 6 of the ECHR, provided that the decision of that body is subject to subsequent review by a judicial body that has full jurisdiction and does in fact comply with those requirements. The Court of Justice’s ruling is consistent with that principle.

But the Court has clarified that the legality of the inspection decision and measures taken as a result depends on the information covered by the decision. The Commission cannot stray beyond the limits of its inspection decision by using the raid to gather information related to a suspected infringement that is outside the scope of the decision authorising the inspection.  However, it seems that if by chance or genuine accident the Commission discovers information relating to another infringement in the course of the raid it is not precluded from bringing further proceedings to verify that information.

The Court has gone some way to clarify that the Commission must put all its cards on the table when launching a raid. It cannot bolt on other potential lines of inquiry to the search if these were not set out in the decision.

It will be recalled that the Commission’s investigation into Deutsche Bahn was concluded with commitments in 2013.  The Court’s judgment does not overturn that decision as it was not based on documents found in the second and third inspections.

Case C-585/13 P Deutsche Bahn and others v European Commission ECLI:EU:C:2015:404, judgment of 18 June 2015

Court of Justice dismisses European Commission appeal on oil group State aid

The Court of Justice has upheld a ruling of the General Court that annulled a European Commission decision that held that Hungary had conferred a selective advantage on Magyar Olaj or “MOL” in violation of EU State aid rules.

Hungary and MOL agreed in 2005 to extend the oil group’s rights to exploit 12 hydrocarbon fields for an additional five years. The fee payable for the extension was fixed at 12 per cent of the value of the hydrocarbons extracted and also applied to 137 additional hydrocarbon and natural gas fields owned by MOL.

In 2008 Hungary’s mining laws changed resulting in an increase in the extension fee to 30 per cent of the value of the extracted resources. This increase was not applied to MOL’s fields which continued to benefit from the lower rates agreed in 2005.

The Commission found that this amounted to unlawful State aid because it had the effect of preferring MOL over its rivals by granting it the benefit of lower rates from 2008. It ordered recovery in the sum of EUR 103 million.

The Court of Justice agreed with the General Court that the circumstances did not involve State aid. There was insufficient nexus between the 2005 agreement and the 2008 legislative change to conclude that MOL had benefited from a selective advantage. The fact that the 2005 rates were agreed following negotiation between MOL and Hungary did not mean that there was a selective advantage.

 

The judgment affirms that the limited discretion of a Member State to determine the level of additional fees through agreement with the affected business can be distinguished from a legislative discretion that automatically grants a selective advantage to the economic operator. The Court also rejected as relevant the fact that MOL was the only operator to enjoy the lower rates from 2008. It appears that the Commission had not established that the 2005 agreement was concluded in anticipation of the 2008 changes. The issue of whether the measure was selective had been discussed only in relation to the 2005 agreement and not through the combination of the 2005 agreement and 2008 legislative changes. The judgment has firmly put the onus on the Commission to justify its case and underscores that it must clearly establish the circumstances giving rise to the alleged selective advantage.

Case C‑15/14 P - European Commission v MOL Magyar Olaj- és Gázipari Nyrt, judgment of 4 June 2015.

Amazon in new European competition probe

The European Commission has announced a further antitrust investigation into Amazon’s e-book business.  The Commission alleges that Amazon has abused its dominant position by insisting on anti-competitive terms in its contracts with publishers.  Under scrutiny are Amazon’s most favoured nation (MFN) clauses which require e-book publishers to inform Amazon when they offer alternative or more advantageous terms to competitor e-book distributors and require publishers to offer Amazon equivalent terms to those offered to rivals.

The Commission has said that it will focus  on Amazon’s English and German e-book businesses.  It believes that the restrictions make it more difficult for Amazon’s rivals to offer innovative services.

This is the second time that the e-book sector has been examined by the Commission.  In 2011 the Commission launched a case against Apple and five international publishers alleging that they colluded to restrict retail price competition.  The case was closed by commitments.

MFN clauses have been the subject of antitrust challenges in other countries.  A US court found in 2013 that Apple was in violation of US antitrust law through its organisation of a conspiracy among publishers to increase e-book prices using MFNs.

Amazon is Europe’s largest e-book distributor and has faced competition investigations in the member states including in the UK and Germany.  Amazon is also one of the companies under investigation by the Commission under State aid rules in respect of individual tax arrangements agreed with the member state tax authorities.  The latest investigation will no doubt increase the pressure that the company is under in defending antitrust cases around the world.

Source:  Antitrust: Commission opens formal investigation into Amazon's e-book distribution arrangements, Brussels, 11 June 2015

First and (Possibly) Last UK Criminal Cartel Trial of its Kind

A trial began on 2 June in the first UK criminal cartel prosecution since the Competition and Markets Authority obtained its powers on 1 April 2014.  The case may also represent the last prosecution of its type under the old formulation of the statutory criminal cartel offence requiring proof of dishonesty.

The CMA alleges that two former executives of Kondea and Galglass (Clive Geoffrey Dean and Nicholas Simon Stringer) dishonestly conspired to fix the price of galvanised steel tanks supplied to building contractors.  The CMA announced the charges in July 2014.  Another individual, Peter Nigel Snee and managing director of Franklin Hodge Industries, has also pleaded guilty and is a witness in the Dean and Stringer trial. 

The CMA is bringing this prosecution under the old version of the criminal cartel offence contained in section 188 of the Enterprise Act 2002.  The Enterprise and Regulatory Reform Act 2013 (ERRA13) introduced changes to the definition of the cartel offence.    Under the (pre 1 April 2014) definition of the cartel offence an individual is guilty of an offence if he dishonestly agrees with one or more persons to make or implement, or cause to be made or implemented, arrangements whereby at least two undertakings will engage in one or more prohibited cartel activity.  Section 47 of ERRA13 removed the requirement that an individual must be acting “dishonestly” for these purposes. The cartel offence (subject to the amendments brought about by ERRA13) only applies to agreements within section 188(1) of the Enterprise Act made on or after 1 April 2014.  The original cartel offence (which requires that an individual acts “dishonestly”) continues to apply to ongoing investigations and prosecutions and cases involving agreements and arrangements which were made before 1 April 2014.  In respect of the post 1 April 2014 cartel offence, section 188A of the Enterprise Act sets out certain circumstances in which the cartel offence (as amended by the removal of the requirement to prove that the individual acted “dishonestly”) will not be committed.

The first and to date only criminal sanctions in respect of the cartel offence were obtained in June 2008 in the Marine Hose case.  However, the convictions were secured through a ground-breaking plea agreement with the US Department of Justice so it cannot be said that that case represents the UK’s first home grown criminal cartel conviction.

The trial is expected to last six to eight weeks.  It is significant that the CMA believes that it has sufficient evidence to support a case under the old rules, whereas now the evidential burden is lower.  Counsel for the defence has noted that the price fixing arrangements were aimed to protect jobs and has urged the jury to consider whether such acts would be perceived as dishonest by the standards of an ordinary person.