The scope of interpretation of several provisions of Switzerland’s cartel law has evolved following a recent Federal Supreme Court decision
|1 Minute read|
|Agreements that significantly restrict competition in a specific market and that are not justified on grounds of economic efficiency, as well as all agreements that eliminate effective competition, are unlawful. |
In the past, the significance criterion has been understood and applied as the core of a competition law analysis. The Federal Supreme Court reversed: any horizontal agreements on prices, quantity, customers and territory and vertical agreements on resale prices and foreclosure of territories, in principle (at least), significantly restrict effective competition. The notion of significant restriction to competition is a de minimis clause. In the future, the core of a defense will be to prove that the agreement can be justified on grounds of economic efficiency.
Switzerland amended its competition legislation in 1995, introducing a legal regime that was in line with international and, importantly, European legal standards in its Law on Cartels and other Restraints of Competition (Bundesgesetz über Kartelle und andere Wettbewerbsbeschränkungen or LCart). In a further reform, in 2004, Switzerland made another step towards convergence with European standards and introduced direct sanctions for certain horizontal and vertical agreements (article 5(3) and (4) LCart) and abuse of dominance (article 7 LCart). These provisions mirror in principle those in articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) – the calculation of the sanctions rests on the same principles as those applied in the European Union.
The current substantive provisions on horizontal and vertical agreements (article 5 LCart) are akin to a system of legal exception (ie the prohibition and the exception are only applicable together). They generally capture and declare as unlawful agreements which eliminate effective competition or which significantly restrict effective competition and cannot be justified on grounds of economic efficiency. Certain types of horizontal and vertical agreements are presumed to eliminate effective competition and cannot be justified unless the presumption is reversed.
Several recent developments relating to article 5 LCart have brought great controversy when it comes to its application by the competition authorities:
A series of four contradictory decisions by the Federal Administrative Court (Bundesverwaltungsgericht) caused uncertainty as regards the so-called significance test in the assessment of anti-competitive agreements.
This was eventually resolved when the Federal Supreme Court (Bundesgericht or FSC) handed down its decision on appeal of the first of these decisions (Gaba/Elmex) on June 28 2016. In that decision, which concerns obstacles to the parallel import of toothpaste, the Federal Supreme Court addressed fundamental questions on the application of the LCart by the Competition Commission (Wettbewerbskommission) and the lower courts in respect of horizontal agreements on prices, quantity, customers and territory (article 5(3) LCart) and vertical agreements on resale prices and foreclosure of territories (article 5(4) LCart). The reasoning for the decision was, however, only published in April 2017. It clarifies how the competition authorities must examine and determine whether horizontal and vertical agreements significantly restrain competition and are thus prohibited – and as the case may be sanctionable – subject to grounds of economic efficiency.
In the autumn of 2017, the FSC released two other decisions on the same matter, and reversed and remanded the matter to the Federal Administrative Court to issue a holding in line with the Federal Supreme Court's Gaba/Elmex decision. Recently, on October 24, it expressly confirmed its Gaba/Elmex decision again in a case concerning the prohibition of parallel imports of BMW cars und upheld a sanction of CHF157 million (approximately $134.5 million) levied upon BMW.
The Gaba/Elmex judgment deals with the assessment of a vertical agreement prohibiting parallel imports into Switzerland. The following provisions of the LCart bear relevance to this case:
'Article 4(1) LCart – Definitions
Agreements affecting competition are binding or non-binding agreements and concerted practices between undertakings operating at the same or at different levels of production which have a restraint of competition as their object or effect.
Article 5 – Unlawful Restraints of Competition
 Agreements that significantly restrict competition in a market for specific goods or services and are not justified on grounds of economic efficiency, and all agreements that eliminate effective competition are unlawful.
 Agreements affecting competition are deemed to be justified on grounds of economic efficiency if:
a. they are necessary in order to reduce production or distribution costs, improve products or production processes, promote research into or dissemination of technical or professional know-how, or exploit resources more rationally; and
b. they will under no circumstances enable the parties involved to eliminate effective competition.
 The following agreements between actual or potential competitors are presumed to lead to the elimination of effective competition:
a. agreements to directly or indirectly fix prices;
b. agreements to limit the quantities of goods or services to be produced, purchased or supplied;
c. agreements to allocate markets geographically or according to trading partners.
 The elimination of effective competition is also presumed in the case of agreements between undertakings at different levels of the production and distribution chain regarding fixed or minimum prices, and in the case of agreements contained in distribution contracts regarding the allocation of territories to the extent that sales by other distributors into these territories are not permitted.'
In the past, the competition authorities examined the 'significant restriction' criteria using qualitative (for instance, the type of agreement or hindrance) and quantitative (market volume that was affected by the agreement for example) elements. There was no cumulative threshold required, and either of the elements outweighing the other could render an agreement to significantly restrict effective competition.
A peculiarity of the LCart is that only agreements that are presumed to eliminate effective competition are subject to a direct monetary sanction.
Implications of the FSC's Gaba/Elmex judgment
Gaba International (nowadays a subsidiary of Colgate-Palmolive) granted a licence to Gebro Pharma for the manufacture and distribution of Elmex toothpaste in Austria. In the licence agreement, Gebro Pharma undertook to manufacture and distribute the products only in the contractually agreed territory, and neither directly nor indirectly export them to other countries.
Swiss retailer Denner, who attempted to import Elmex toothpaste from Austria, filed a complaint with the Competition Commission alleging a restraint of competition as it failed to import Elmex toothpaste from Austria.
The Competition Commission considered the contractually agreed export ban for Elmex toothpaste manufactured by Gebro under licence in Austria as an unlawful prohibition of parallel imports within the meaning of article 5(4) LCart. With quite some effort, it then examined whether the agreement had any effects on competition – firstly in the context of the question as to whether the agreement eliminated effective competition as presumed in article 5(4) LCart and secondly, after the rebuttal of this statutory presumption, in the context of whether the agreement significantly restricted effective competition. The Competition Commission concluded that the agreement significantly restricted effective competition and could not be justified on grounds of economic efficiency. Accordingly, it imposed a considerable monetary sanction upon Gaba and a smaller sanction upon Gebro.
Both Gaba and Gebro appealed the Competition Commission's decision to the Federal Administrative Court which handed down its judgment at the end of 2013. This judgment led to controversial discussions amongst practitioners and scholars. With reference to EU law, the Federal Administrative Court held that territorial restrictions within the meaning of article 5(4) LCart by their very nature a majore ad minus had to be qualified as a significant restriction of competition. In other words, the rebuttal of the statutory presumption that the conduct in question eliminated competition meant the actual implications on competition needed not be examined to conclude that the agreement significantly restricted competition. As such, these types of agreements could only be declared lawful if they could be justified on efficiency grounds. This conclusion represented a change from the single case assessment of the significance of competition restrictions that was carried out until then by the Swiss competition authorities. Although the case only concerned a vertical agreement allocating territories, it was clear in view of the structure of article 5 LCart that the same would obviously also apply to horizontal agreements within the meaning of article 5(3).
Subsequent incoherent jurisprudence
In September 2014, nine months after the Federal Administrative Court handed down its Gaba/Elmex judgment, the very same court, although with a different panel of judges, published a decision on a case concerning an alleged horizontal agreement amongst manufacturers of window mountings. The Competition Commission had qualified this as an agreement within the meaning of article 5(3)(a) LCart. Other than in its previous decision, the Federal Administrative Court in this case opposed this (wrongly) alleged concept of per se significance and held, after having concluded that effective competition was not eliminated, that the actual implications on competition must always be examined to conclude that the agreement significantly restricts competition.
This judgment revealed a hefty factional struggle within the court itself. Although a court with full review powers, the Federal Administrative Court did not on its own establish the relevant facts but simply held that the Competition Commission failed to properly establish anti-competitive effects and reversed the decision. This decision was then appealed to the Federal Supreme Court (FSC) by the federal government.
One year later, in November 2015, the Federal Administrative Court again released a decision in line with its Gaba/Elmex judgment in a case concerning parallel imports of BMW cars. In this instance, dealer contracts contained export ban clauses that prohibited the sale of cars into Switzerland. The court held it is sufficient, for the LCart to be applicable, that practices originating in another country were capable of having an effect in Switzerland. In contrast, whether the concerned restriction of competition actually had any effect in Switzerland was not a decisive factor. In the case at hand, the court considered it sufficient that such type of contracts could affect the sale of cars into Switzerland. Furthermore, it held that territorial restrictions within the meaning of article 5(4) LCart, after rebuttal of the presumption that the agreement eliminated effective competition, are to be qualified as per se restrictions of competition and thus confirmed its language in the Gaba/Elmex case that such types of agreements a majore ad minus significantly restrict competition.
This should not be the end of that court's incoherent jurisprudence. Already in December 2015, the Federal Administrative Court again opposed its previous decision, this time in a case concerning Altimum's alleged resale price maintenance for Petzl headlamps. According to this judgment, qualitative and quantitative effects had to be taken into account to assess whether an agreement significantly restricted competition.
The FSC's Gaba judgment
On April 21 2017, the FSC released the written motivation for its orally deliberated judgment handed down on just under a year earlier. It upheld the Federal Administrative Court's judgment according to which certain types of agreements (ie horizontal agreements on price, quantity, customers and territory [article 5(3) LCart] and vertical agreements on resale prices and absolute territorial protection [article 5(4) LCart]) in principle at least significantly restrict effective competition. Therefore, after rebuttal of the statutory presumption, an analysis of the actual implications of such agreements on competition was not necessary. It was also unecessary that, in such cases, the competition authorities show an actual restriction of competition to establish that the agreement at issue significantly restricts competition.
The judgment clarified that a rebuttal of the presumption that an agreement eliminates effective competition would not change the legal qualification of the agreement (eg that the agreement at issue allocated the territory in which deliveries were permitted). The rebuttal does not concern the agreement (as the basis for the legal presumption) as such but only the question whether the agreement effective competition was eliminated or significantly restricted. Accordingly, if the rebuttal does not change an agreement's legal qualification, its inherent harmfulness remains, quantitative elements need not be considered in order for such agreements to significantly restrict effective competition.
The FSC held that 'significantly restrict' is not a substantive test but a de minimis rule, though did not further qualify it. Indeed, with regard to the Federal Councils dispatch of 1995, the significantly restriction criterion aims at separating cases which are not worth pursuing due to their minimal impact on competition from those which should be pursued by the competition authorities due to their significant – ie appreciable – impact on competition. No clarifications emerge from the judgment when it comes to the justification of agreements significantly restricting effective competition (note that agreements eliminating effective competition cannot be justified).
The FSC gave important clarifications on the effects doctrine. Accordingly, any conduct outside Switzerland that could have an effect in Switzerland is subject to the LCart. In this respect, it rejected any pleas that those effects must be of a certain intensity and only requires that they have a reference to Switzerland, without giving further details. In our view, it suffices that the concerned conduct has the potential to have an impact on competition in Switzerland; according to the FSC, there cannot be a substantive assessment on the matter at this stage of proceedings.
The FSC's subsequent judgments
On October 9 2017, the court handed down two relatively short and straightforward decisions in the window mountings case. It expressly confirmed and clarified that the point at issue with respect to article 5(3)(a) LCart is whether effective competition exists (rebuttal of presumption that the agreement eliminates effective competition). If this proof is successful, competition is significantly impaired because, as the FSC held in Gaba/Elmex, an agreement within the meaning of article 5(3)(a) LCart by definition at least significantly impairs effective competition. Accordingly, it instructed the Federal Administrative Court to render a decision that conforms with its recent holding.
Moreover, the FSC reminded the Federal Administrative Court that it has full review powers. As such, when the administrative court acts as first appeal instance, it must – in principle – on its own establish the relevant facts and gather the required evidence, to determine whether there is a horizontal agreement on prices within the meaning of article 5(3)(a) LCart. The FSC admonished the Federal Administrative Court that it failed to close evidentiary gaps and therefore failed to exercise its review powers.
In its recent BMW decision, the FSC once more confirmed its Gaba/Elmex holding. For the sake of clarity, the FSCstated that agreements captured by article 5(3) and (4) LCart, unless effective competition is eliminated, are not per se prohibited. Rather, they are only prohibited if their justification on economic grounds (article 5(2) LCart) fails. Also, the FSC re-stated that the protective object of the LCart was also potential competition; it suffices for article 5(1) LCart and the evidentiary rules in article 5(3) and (4) LCart to be applicable that the agreements are capable of (potentially) impairing competition. Actual impairment of competition is not required for an agreement to be unlawful.
The Altimum case is still pending before the FSC.
Any agreements within the meaning of articles 5(3) and (4) LCart in principle (at least) signifi-cantly restrict effective competition. Accordingly, there is no room for an impact assessment as to the question of whether such types of agreements significantly restrict competition. The impact assessment is rather a matter to be dealt with when examining possible justifications. The notion in principle seems to leave some room to argue that even agreements which would be captured by articles 5(3) and (4) may not significantly restrict effective competition, that is, when they do not exceed the de minimis threshold. We believe that such can only be the case in exceptional cases.
While previously a defense focused on the question of whether such agreement, after rebuttal of the statutory presumption in article 5(3) and (4) LCart significantly restricted effective competi-tion, greater weight should now be laid on the legal qualification of the agreement – ie is there an agreement within the meaning of articles 5(3) or (4) LCart? If the answer is positive, the defend-ant will have to prove that the agreement can be justified on grounds of economic efficiency. The latter is not easy to prove given the lack of pertinent jurisprudence in Switzerland.
The FSC's Gaba/Elmex judgment led to controversial discussions in Switzerland. Some critics voiced concerns that the court's holding is contrary to the Constitution and its principle of misuse. The FSC, however, made it clear that the Constitution would not prohibit declaring unlawful and per se significantly restricting effective competition certain agreements on competition. The criticism as well as the fact that the FSC did not define a de minimis threshold could sug-gest that the Gaba jurisprudence has to be clarified in that the Competition Commission must nevertheless establish that agreements within the meaning of article 5(3) and (4), which in the EU are deemed restrictions by object, must be capable, having regard to the specific legal and economic context, of preventing, restricting or distorting competition.
In this context, we note that the Competition Commission already in its 2010 decision concern-ing window mountings expressly stated that agreements may be unlawful if from an objective point of view, they are likely to entail harmful effects on competition. The concept of a re-striction by object as applied by the EU Commission and the EU courts was, however, not ap-plied uniformly in Switzerland. We take the view that the approach chosen by the European Court of Justice in its Cartes Bancaires judgment could also be useful to single out cases falling below a de minimis threshold – that is, cases that are unlikely to entail any harmful effects in economic or social terms.
As final conclusion, the judgment means that companies active in Switzerland should be careful when it comes to agreements susceptible of falling within the meaning of articles 5(3) and (4) LCart, the more these provisions are broadly interpreted by the competition authorities. It would therefore be useful if the competition authorities would firstly clarify the definitions of the agreements falling under the scope of these articles as well as, in abstract terms, a de minimis threshold. It would be a welcome improvement if they could also interpret the aforementioned provisions according to their intended meaning and clarify their position as regards possible justifications.
|About the author|
Philipp Zurkinden is head of the competition and regulatory team at Prager Dreifuss. He began his career at the Secretariat of the Swiss Competition Commission and was also involved in the reform works which led to the enactment of the current Federal Law on Cartels (LCart 95). Philipp joined Prager Dreifuss 1999, and advises local and international clients in various sectors in cartels, abuse and merger procedures. He regularly works with other international law firms in multijurisdictional merger filings and international cartels and abuse proceedings. He is a professor of Swiss competition law at the University of Basel, and has also acted as external expert of the Swiss government and the OECD, in connection with competition legislation and politics and regularly participates in the ICN conferences. He is past president of the European Lawyers Association, as well as the vice chairman of the competition group of the Swiss Bar Association; chairman of the competition group of the Bernese Bar Association; member of the board of the Swiss Association of Competition Law (Asas); and a member of the Studienvereinigung Kartellrecht and the IBA competition group. He is also a trustee of the Emirati-Swiss Friendship Platform. Philipp is listed in various competition lawyers' rankings, including in Chambers Europe and Who's Who Legal. He has authored numerous articles in Switzerland and abroad. He speaks German, French, English, Italian and Spanish fluently.
|About the author|
Bernhard Lauterburg is a member of Prager Dreifuss' competition law team. He concentrates on competition law, including advice to domestic and foreign clients on antitrust and merger proceedings involving both Swiss and EU competition law, to private and public entities on procurement law and other competition-related matters. Apart from competition law, he represents clients in various commercial matters before courts and arbitral tribunals and has in depth knowledge of international trade regulation, including investment treaty law and arbitration and WTO law. He was a Swiss rapporteur for the LIDC Kyiv Congress in 2013.