European Competition Law Newsletter – July 2014

July 1, 2014

Use of Rebates and Naked Restrictions by Dominant Companies

In 2009, the European Commission (EC) found that Intel had abused its dominant position on the worldwide market for x86 CPUs (computer chips) by implementing a strategy aimed at foreclosing from the market its only serious competitor, AMD. Specifically, Intel had granted rebates to certain manufacturers and one retailer, conditional on the use of x86 CPUs, and had made direct payments (which the EC called “naked restrictions”) to manufacturers in order to halt, delay or limit the launch of specific products incorporating chips from AMD.

The EC imposed a fine on Intel of €1.06 billion, which is the highest fine ever imposed by the EC on a single company for an infringement of the competition rules.

On 12 June 2014, the General Court of the EU (the EU’s second highest court) upheld this EC decision in full. According to the court, the conditional rebates were exclusivity rebates, and exclusivity rebates granted by a dominant company are, by their very nature, capable of restricting competition and foreclosing competitors from the market and therefore are abusive. Concerning the direct payments, a dominant company’s only interest in preventing in a targeted manner the marketing of products equipped with a product of a specific competitor (here, AMD) must be to harm that competitor.

This is an important judgment for dominant (or potentially dominant) companies active in the EU, as well as their customers, suppliers and competitors. Third parties such as customers can use the principles set out in this case to argue that the business practices of a dominant company are illegal, and also to sue for damages.

Umbrella Pricing is Covered; Good News for Cartel Damage Claimants

In another significant development for cartel damages litigation in the EU, the General Court of the EU held on 5 June 2014 that claimants may seek recompense from cartelists for losses caused by increases in prices of products supplied by a company that was not a party to the infringement (“umbrella effects”).

This is a boost for consumers and businesses that claim to have suffered losses from cartel activity in the EU. It is consistent with the basic principle under EU law that full compensation should be available to purchasers affected by a cartel.

As a result of the case, a victim of umbrella pricing does not need to show that it had contractual links with the cartelists. It just needs to be established that, in the circumstances of the case, the cartel was liable to result in umbrella pricing being applied by third-party suppliers, from which the claimant had made purchases. This is justified because, as the court held, “a cartel can have the effect of leading companies that are not a party to it to raise their prices in order to adapt them to the market price resulting from the cartel, a matter of which the members of the cartel cannot be unaware.”

Individual Pleads Guilty to Cartel Activity in the UK, Faces Jail Time

There has been an important development in one of the two criminal cartel cases against individuals currently being run in the UK by the Competition and Markets Authority (CMA).

At a hearing on 17 June 2014, Southwark Crown Court (London) permitted reporting of the fact that Peter Nigel Snee had pleaded guilty at an earlier hearing to the charge that he had committed the criminal cartel offence (section 188 of the UK Enterprise Act 2002). If convicted, he faces jail time and/or an unlimited fine.

This follows confirmation by the UK Office of Fair Trading (OFT, now the CMA) that on 27 January 2014 it had charged an individual under section 188 after an investigation into suspected cartel conduct regarding the supply in the UK of galvanised steel tanks for water storage.

The CMA is conducting a related civil investigation into whether businesses have infringed the UK Competition Act 1998 (for which they could be fined in the normal way).

To date, the OFT/CMA has not had much success in the area of criminal cartel enforcement against individuals. Only one case (arising out of the marine hose cartel, where guilty pleas were also entered, but this was related to a U.S. investigation) has been successful, while another (arising out of the British Airways/Virgin cartel) rather embarrassingly collapsed as a result of procedural problems. This case therefore will improve the CMA’s enforcement record and should bolster the CMA, but the UK still awaits its first jury trial for the criminal cartel offence.

Do You Need to Audit that Subsidiary Prior to Sale?

A recent judgment from the Court of Justice of the European Union (ECJ), the EU’s highest court, provides a reminder that, even after a subsidiary has been sold, its former parent company retains responsibility for any competition law infringements by the subsidiary during the period of ownership. At the same time, if the new owner discovers the infringement after the acquisition and blows the whistle (thus wholly or in part protecting itself and the subsidiary from a fine) the former parent will not benefit from this leniency application and can still be fined by a regulator.

The judgment, handed down on 19 June 2014, concerned the EC’s decision in the industrial bags cartel (originally decided in 2005). One of the companies challenged the fine imposed on it as a former parent. In holding that the protection gained by a leniency application made by a purchaser does not extend to the former owner, the ECJ said that this was justified since the earlier parent neither contributed to the detection of the infringement nor controlled the subsidiary at the time of the application. The whistleblowing rules are designed to promote the detection of infringing conduct, and a former parent that did not make a leniency application has not contributed to detecting the conduct.

There is no getting away from the case law on parent liability. However, a vendor can protect itself to some extent by carrying out a competition law audit prior to disposal and, if an infringement is found, making a leniency application itself. Even if an infringement is not found, the fact of an audit may convince a seller that it is buying a “clean” company. Of course, an audit won’t be appropriate in all cases. However, if the standard risk assessment shows that there is (in particular) cartel risk, and especially if a purchaser is likely to do its own audit, then doing a pre-disposal audit and, if relevant, making a leniency application can be much cheaper than paying a cartel fine down the road.

Additional European competition law news coverage can be found in our news section.

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