European Union: The ripple effect

The European Commission oversees one of the most sophisticated and complex competition regimes. Its reach extends throughout the European Union (EU) and it is responsible for ensuring consistent enforcement of the competition rules among a network of national competition authorities. It has always benefited from the leadership of highly visible and respected Commissioners and the current Commissioner, Neelie Kroes, seems to have driven forward a strong enforcement agenda with particular relish. She is expected to maintain a robust enforcement policy for the last 12 months of her term in office and further high profile actions are likely.

Historically, the Commission's flagship enforcement tool was the EC Merger Regulation and merger cases continue to represent a significant part of the continuing work of the Commission's Directorate General for Competition. The downturn in the economy and the tendency for deals to unravel will lead to a decline in the number of mergers reviewed by the Commission, but it will still continue to vet hundreds of important transactions affecting the EU. Its willingness to intervene to protect competition is likely to be further bolstered by the European Court of First Instance's judgment of September 9 2008 rejecting a claim for damages by MyTravel Group against the Commission, notwithstanding fundamental errors of economic analysis in its prohibition decision involving a merger in the UK package holiday market.

With the modernisation of its investigative powers in 2004 and the enhancement of its leniency programme in 2006, cartel detection and enforcement has become extremely high profile, undoubtedly due to the eye-catching fines being imposed by the Commission (see table). This has only led to increased demand from companies for immunity/leniency and has placed further strain on the Commission's limited resources. To improve its capability in this field, the Commission has introduced settlement procedures for cartel cases, giving cartel participants the opportunity to receive a 10% reduction in fines in return for an admission of liability.

The Commission's high point in enforcing the prohibition on abuse of a dominant position was the Microsoft decision in 2004 and the eventual upholding of its reasoning by the European Court of First Instance in 2007. This has spurred the Commission on, and it is continuing to actively enforce Article 82 of the EC Treaty, including outside of traditional areas. It is continuing to investigate Microsoft and is also looking into difficult questions relating to the harmful exercise of intellectual property rights by dominant companies.

Merger enforcement

The EU merger regime has been the benchmark by which to judge the effectiveness of the Commission's other competition work. The EU merger control rules are set out in Council Regulation (EC) 139/2004 (Merger Regulation) and it imposes strict and demanding timetables on the Commission. This has led to well-staffed case teams and the hands-on involvement of the management. With some notable exceptions (in 2002 the European Court of First Instance overturned three Commission merger decisions), this has resulted in swift, reliable and rigorous analysis of even the most complex mergers.

Under the Merger Regulation, the Commission has, subject to limited exceptions, exclusive jurisdiction within the EU over concentrations with a Community dimension (the so-called one-stop-shop principle). Such transactions require prior notification to and clearance by the Commission. Where the Merger Regulation does not apply, the transaction is subject to the merger control rules of the EU member states.

Jurisdiction

The Commission has competence over a merger if the conditions in either of two turnover thresholds are met.

The upper thresholds are satisfied where:

• the combined aggregate worldwide turnover (in the preceding financial year) of all the undertakings concerned exceeds €5 billion ($7.1 billion); and
• the aggregate Community-wide turnover of each of at least two of the undertakings concerned exceeds €250 million, unless each of the undertakings concerned achieves more than two-thirds of its Community-wide turnover in one and the same member state (this is known as the two-thirds rule).

Where these thresholds are not met, the secondary thresholds must be applied.

These secondary thresholds are satisfied where:

• the combined aggregate worldwide turnover of all the undertakings concerned is more than €2.5 billion;
• in each of at least three member states, the combined aggregate turnover of all the undertakings concerned is more than €100 million;
• in each of those three member states, the aggregate turnover of each of at least two of the undertakings concerned is more than €25 million; and
• the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than €100 million, unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same member state.

The rigidity of the turnover thresholds does not always result in the most appropriate competition authority having competence to assess a merger. The Merger Regulation has specific provisions that permit the Commission and the national competition authorities – often at the request of the parties – to reallocate jurisdiction among themselves. Since 2004, there have been 150 requests by merging parties asking for the case to be referred up to the Commission, of which 141 have been accepted (this compares with 41 requests by parties for referral back to the member state, of which 38 were accepted). It is therefore important for advisers to assess early on whether they would be better off seeking the transfer of the case to another authority.

Timetable

The Commission's merger investigations are divided into two phases. The preliminary investigation phase (Phase I) is intended for mergers that do not raise serious competition issues or those where remedies can easily and readily resolve the issue. The in-depth investigation phase (Phase II) is generally kept in reserve for mergers that require a detailed and thorough economic analysis of the competition issues. There is however a blurring of the two phases as parties are increasingly involved in lengthy pre-notification contacts and complex cases can be resolved during Phase I.

In Phase I, the Commission has 25 working days (increased to 35 working days where the parties concerned offer commitments) from the working day following receipt of the completed notification to determine whether a merger raises serious doubts as to its compatibility with the common market. It must then decide to clear the transaction or to open a more in-depth investigation.

In Phase II, proceedings must be concluded within a maximum of 90 working days (increased to 105 working days where the parties concerned offer commitments), at the end of which the Commission must approve (either unconditionally or subject to conditions) or prohibit the merger.

See Merger regulation timetable diagram below.

Merger regulation timetable

Substantive assessment

A new test was introduced when the revised Merger Regulation came into force in 2004. It requires the Commission to prohibit transactions that would significantly impede effective competition in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position. This new standard (SIEC test) seeks, among other things, to avoid an enforcement gap in relation to harmful (unilateral) competitive effects where the merged entity is not a clear market leader in terms of market share.

It is still extremely rare for the Commission to prohibit mergers outright: it has only prohibited 20 mergers since the Merger Regulation came into force in 1989. The last merger to be prohibited was between the low cost airline Ryanair and Aer Lingus, the former Irish flag carrier, in June 2007. Both airlines were viewed by passengers in Ireland as each others' closest competitors in Ireland, as well as operating from the same home airport.

Most mergers raising competition concerns are approved on the basis of a package of commitments and undertakings offered by the parties. Generally, the Commission requires structural remedies, such as the divestment of assets or brands, but behavioural commitments (long-term supply arrangements, for example) can be appropriate, for example where there are concerns of vertical foreclosure.

Powers and obligations

The Commission has wide ranging powers to request information from notifying parties and interested third parties (customers, suppliers and competitors). It has the power to carry out on-site inspections at the premises of the notifying parties and even third parties. It also has the power to fine companies for supplying incorrect or misleading information and for failing to supply information within the period fixed by the Commission.

The Commission can also impose fines of up to 10% of the aggregate turnover of the undertakings concerned where they intentionally put into effect a concentration before it has been declared compatible with the common market. There are specific rules for public bids or transactions in securities, though they are generally subject to the same regime.

Anticompetitive agreements

General framework

The Commission has increasingly been focussing its resources on cartel investigations and has put in place a package of measures to incentivise whistleblowers and streamline the procedure for punishing cartels. These significant infringements represent only the tip of the iceberg of arrangements caught by the prohibition on anticompetitive arrangements contained in Article 81 of the EC Treaty.

Article 81 EC has two principal limbs. Article 81(1) EC prohibits all agreements between undertakings that may affect trade between member states and that have as their object or effect the prevention, restriction or distortion of competition within the common market. Article 81(3) EC exempts from the prohibition agreements that restrict competition within the meaning of Article 81(1) EC if they satisfy four cumulative conditions:

• the agreement must improve the production or distribution of goods or promote technical or economic progress;
• consumers must receive a fair share of the benefits;
• there must be no restriction that is not indispensable; and
• the agreement must not substantially eliminate competition.

Agreements that are caught by Article 81(1) EC are automatically void, pursuant to Article 81(2) EC, unless they are exempted under Article 81(3) EC.

The majority of agreements have little if any harmful affect on competition, but a significant number of supply agreements, as well as cooperation agreements, require an advanced assessment in order to determine their true impact in the market. The Commission has published guidelines on the applicability of Article 81 of the EC Treaty to vertical (supply) arrangements (2000) and horizontal cooperation agreements (2001). These guidelines set out the general approach to be followed when assessing different types of horizontal and vertical agreements and provide specific guidance. The Commission has also issued a number of block exemptions that automatically exempt particular agreements (many distribution agreements, for example).

Hardcore cartel infringements

Certain agreements between companies are considered particularly harmful to competition as they are intended or are likely to reduce choice, lead to increased prices, and bring no countervailing benefits. They are therefore considered hardcore violations of the competition rules. When engaged in by competitors, they principally take the form of cartels. If detected, they are subject to severe fines and, in certain countries such as the UK, there is the possibility of criminal sanctions.

The following conduct engaged in by competitors is typically considered hardcore:

• price-fixing;
• limiting output;
• sharing customers or markets; and
• collusive tendering.

Leniency programme

In order to increase the detection rate for cartels, the Commission introduced a leniency programme. The current leniency programme dates from 2006 and allows companies to apply for 100% immunity from fines or, if that is not available, for a fixed range percentage reduction in any fine (under leniency, the first company to provide significant added value receives a fine reduction of 30% to 50%, the second company 20% to 30% and the subsequent cooperative companies up to 20%). The reduction bracket and final amount of any reduction will depend on the timing and the value of any cooperation. Full immunity is available to the first company that submits information to enable the Commission to carry out a targeted inspection in connection with the cartel or come to an infringement decision. The company must also, among other things, cease its involvement in the suspected cartel and cooperate with the Commission on a continuing basis. The immunity/leniency programme has been highly successful and has led the Commission to introduce new settlement procedures to help it deal more quickly with cartel investigations.

New settlement procedures for cartels

The Commission introduced a settlement procedure for cartels in June 2008, emphasising that it was neither US-style plea-bargaining or a negotiated fine reduction programme. The primary aim of the settlement procedure is to reduce the administrative burden of very complex and protracted proceedings through the introduction of a simplified administrative process. It should also reduce the likelihood of appeals as the cartel participant must admit its liability and confirm the level of the fine it is prepared to pay.

The principal benefit of the new settlement procedure is the 10% reduction in fines as a result of reaching agreement with the Commission and the possibility of minimising management time and resources, including legal costs, which would otherwise be incurred as a result of a full-blown investigation.

However, the Commission alone retains full discretion to determine which cartel cases may be suitable for settlement, as well as the right to discontinue the process (altogether in a specific case or with respect to one or more of the parties) at any stage up to the adoption of a decision.

The idea of enabling parties to reach a settlement with a competition authority in cartel cases is not new. The US has a well established and more radical settlement regime, but the effectiveness of the Commission settlement procedure will depend on whether it is certain and flexible enough to encourage cartel participants to engage in settlement discussions.

Abuse of a dominant position

General framework

The abuse of a dominant market position is prohibited by Article 82 of the EC Treaty. A firm has a dominant position if it is able to behave independently of its competitors, suppliers and customers: that is, if it enjoys market power. Relevant factors in determining whether a firm is in a dominant market position include its market share, overall levels of concentration in the market, the company's position relative to that of its competitors and the existence of barriers to entry into the market. Dominance is unlikely to exist where a firm has a market share of less than 40%.

Dominant firms must not stifle competition or exploit their dominant position, but can continue to compete fairly to expand their business. Activities that can raise competition problems include:

• refusing to supply providers/customers without objective reasons;
• imposing unfair purchase or selling prices or other unfair trading conditions such as excessively high prices or onerous contract terms that can only be obtained as a result of holding a dominant position;
• charging discriminatory prices, namely supplying goods or services of the same description under the same conditions at different prices without objective reason; and
• engaging in predatory behaviour, namely pricing below a specified measure of costs with the aim of driving a competitor out of the market.

Enforcement practice

Before the Commission's success in challenging Microsoft's dominance of the PC operating systems market, its experience in enforcing Article 82 EC was a rather hit and miss affair. Only a small number of investigations resulted in findings of infringement and cases often outlived the case team. However, the Microsoft case seems to have given additional impetus to the Commission, and it is more willing to devote resources to difficult and challenging cases involving alleged infringement of Article 82 EC beyond the regulated or traditionally heavily monopolised sectors.

Besides further investigations into Microsoft's commercial practices, which opened at the beginning of 2008, the Commission is assessing whether intellectual property (IP) holders have abused their dominant position by licensing their IP on unreasonable and unlawful terms. Cases against Rambus and Qualcomm raise questions about the appropriate boundary of enforcement for Article 82 EC because they directly interfere with companies' innovation strategies. This is an area where competition enforcement is generally divisive, as critics argue that it threatens to stifle future economic progress.

Future trends

Commissioner Kroes has been a strong advocate of using sector inquiries to highlight and uncover practices harmful to competition. A significant competition inquiry was launched into the energy sector, and this has generated a number of new investigations in the gas and electricity industry. Other inquiries have been initiated into sectors as diverse as business insurance, retail banking and the pharmaceutical industry. The Commission generally hopes that high profile actions in a few cases will produce a ripple effect and help to remove barriers preventing the development of competitive market structures. Unless there is coordinated action by the Commission and the national competition authorities, it is difficult to see how the ripple effect will help to remove what are often entrenched business practices in a particular sector. Nonetheless, it is expected that the Commission will continue to use sector inquiries as an instrument to spread competition advocacy and identify new cases worthy of investigation.

Cartel investigation and enforcement will continue to be high profile and high priority for the Commission, although it is a moot point whether the new settlement procedures will free up sufficient resources to allow more cases to be dealt with. It is far from certain whether cartel participants will be prepared to sign away their right to challenge a cartel finding for a mere reduction of 10%. Nonetheless, in cases with a preponderance of leniency applicants and irrefutable facts, a further reduction in the fine level may be sufficiently appealing to counteract the potential drawbacks.

Linked to the Commission's desire to see greater detection of cartels is an expectation that private parties will be increasingly prepared to seek redress themselves through the courts. There is already some evidence of wronged customers taking action in national courts to obtain compensation from cartel participants. However, civil procedures in many member states are not sufficiently supportive of direct actions. This prompted the Commission to publish a White Paper on damages actions for breach of the EC antitrust rules in April 2008. It suggests specific policy choices and measures to help give victims of infringements of EC competition law access to effective redress and compensation mechanisms. Notwithstanding the White Paper, it is likely that the Commission will continue to be the principal port of call for complainants for some time yet.

Author biographies

Martin Bechtold Allen & Overy Martin Bechtold is a partner in the international antitrust group at Allen & Overy LLP, based in Brussels. Previously, he was a partner in Clifford Chance, working in Frankfurt and Brussels. He was a case handler at the Bundeskartellamt (Federal Cartel Office) in Berlin from 1986 to 1989 and has extensive EU and German merger control experience, including several high profile second phase investigations. Martin's expertise covers the core aspects of competition law (EU merger control, EU cartel and dominance cases, antitrust litigation, and general counselling/advisory/compliance work) as well as broader issues of EU law. David Gabathuler Allen & Overy David Gabathuler is a senior associate in Allen & Overy LLP, based in Brussels. He is an English lawyer who specialises in EU, competition and regulatory law. Before joining the firm, he worked for a number of years as an official at the European Commission and the UK's Office of Fair Trading. He was also previously a legal adviser to the Confederation of British Industry. He has wide-ranging experience of advising on the application of the EU and UK competition rules, including in the financial sector.