European Competition Law Newsletter – January 2014

January 2, 2014

UK Office of Fair Trading Fines Show Risk for Small Companies and Short-Term Cartels

During December 2013, two UK Office of Fair Trading (OFT) cases showed once again that small companies can be fined for cartel infringements in the EU and also that short-term cartels will not be spared.

In the first decision, announced on 6 December 2013, the OFT fined three companies for engaging in collusive tendering concerning the supply and installation of access control and alarm systems to retirement properties in the UK. A fourth party escaped fines since it was the whistleblower (first in) under the OFT’s leniency programme. The combined value of the at least 65 tenders involved amounted to only around GBP1.4 million. The total fines on the small companies involved amounted to only around GBP50,000, with one party fined under GBP2,000.

In the second case, the OFT announced on 12 December 2013 that a prescription medicine supplier, Hamsard, had agreed to pay a fine of GBP388,000 for entering into a market-sharing agreement with competitor Celesio in the UK. Celesio escaped a fine entirely since it was the whistleblower. Hamsard’s fine was reduced since it also used the OFT’s leniency programme (but as second in) and cooperated with the OFT under its settlement procedure, including by agreeing to pay the fine. This was a short-term cartel, running only between May and November 2011.

The fines in these cases were relatively small but it is clear that being involved in a cartel remains a key risk area for all businesses. Apart from fines, cartel decisions inevitably give rise to reputational damage and these days it is almost inevitable that customers will bring private actions for damages. Competition compliance programmes remain very important, whatever the size of a business. Apart from reducing the risk of cartel (or other anti-competitive) activity in the first place, a key benefit is the possibility of taking advantage of leniency if the programme catches a cartel.

EC Publishes Latest Pharma Patent Settlement Survey, But Legal Position Still Unclear

The European Commission’s (EC) latest report on pharmaceutical patent settlement agreements in the EEA (the EU plus three other countries), covering 2012, was published on 9 December 2013. The EC started these reports after its 2009 competition inquiry into the pharmaceutical sector, which identified settlements that limit generic entry and provide at the same time for a value transfer from the originator to the generic company as potentially raising competition concerns.

The headline finding in the report is that, compared with previous years, the number of such potentially problematic settlement agreements has continued to fall, in 2012 accounting for around 7% of all patent settlements in the pharmaceutical sector in the EEA.

The EC says that this shows the industry’s increased awareness of potentially problematic practices. This may or may not be the case, but in any event this area of law remains unclear despite these reports and the EC’s June 2013 Lundbeck decision. In that case, the EC imposed a fine of EUR93.8 million on Danish pharmaceutical company Lundbeck and fines totalling EUR52.2 million on several producers of generic medicines for agreeing to delay the market entry of cheaper generic versions of citalopram, a blockbuster antidepressant.

The EC’s very strict approach in that case has been appealed to the EU General Court (GC) and the correct legal position will not be known until the court opines. Meanwhile, legal uncertainty limits the appetite of originators and generics to negotiate patent settlement agreements and indeed probably reduces the likelihood that generic suppliers will challenge patents in the first place (which could in turn skew the findings of the EC’s monitoring reports going forward).

It Doesn’t Matter What You Call It; “Co-promotion” Agreement Fined as a Cartel

On 10 December 2013, the EC imposed fines of EUR10.8 million on Johnson & Johnson (J&J) and EUR5.5 million on Novartis for an “intolerable” agreement to share “monopoly profits” on a pharmaceutical product in the Netherlands. The agreement between the companies was termed a “co-promotion” agreement but was seen and fined as a cartel.

The case concerned fentanyl, a painkiller produced and sold by J&J. In 2005, Novartis was preparing to sell its own generic version of fentanyl, which was no longer protected in the Netherlands. However, according to the EC, instead of competing against each other, the companies agreed that Novartis would abstain from entering the Dutch market in exchange for “a part of [Johnson & Johnson’s] cake”. They therefore concluded a so-called “co-promotion agreement” which gave Novartis strong incentives not to enter the market. In particular, under the pretext of “co-promotion”, J&J would make monthly payments to Novartis for as long as there was no generic on the market.

Although this case arose in the pharmaceutical sector and concerned generics, this was not a pharmaceutical “patent settlement” case. It was simply a situation in which one party paid another to keep a competing product out of the market. A similar scenario in any other sector would be viewed and treated in exactly the same way.

EU Court Accepts High Market Shares Need Not be Definitive in Tech Deals

An attempt to overturn the EC’s 2011 clearance of Microsoft’s acquisition of Skype was rejected by the GC in an 11 December 2013 ruling. The GC ruled that, despite Microsoft’s very high post-transaction share of a particular market (80-90% of video communications on Windows-based PCs), the EC had been correct to clear the transaction unconditionally.

The GC agreed that even this market share level was not indicative of market power given the particular characteristics of the market in question, which is marked by short innovation cycles and products which are free. Therefore, if Microsoft started to make PC users pay for such a product, this would only encourage them to switch to other providers that continued to offer their services free of charge.

This judgment is very encouraging for parties considering mergers, acquisitions or joint ventures in similar fast-moving markets. If it can be shown that competitors and potential competitors remain able to win customers either through existing or new products, then very high market shares won’t be a bar to clearance. The EC, responding to the judgment, emphasized this point by stating that it “…confirms the [EC]’s assessment of new markets and technologies… The [EC]’s decision to clear the transaction did not put the development of innovative products and services at risk. The [EC] will continue to ensure that competition in nascent and fast evolving markets is maintained.” This is similar to the U.S. approach, although is not necessarily reflected in other jurisdictions around the world.

State Aid to Professional Football Clubs: Any Economic Advantage Can Amount to State Aid

For the second time this year, the EC has launched an investigation into alleged illegal aid provided by an EU Member State to professional football clubs. On 18 December 2013, the EC announced that it is looking into various support measures granted by Spain to three clubs without approval from the EC. The measures are tax advantages granted to Real Madrid, Barcelona, Athletic Club Bilbao and Club Atletico Osasuna, the transfer of a significant piece of land from the City of Madrid to Real Madrid, and State guarantees issued in favour of Valencia, Hercules and Elche which were used to finance those clubs when they were in financial difficulties. The EC stated “professional football clubs should finance their running costs and investments with sound financial management rather than at the expense of the taxpayer”. Third parties are invited to comment and if the investigation confirms the existence of the allegedly illegal aid, the EC will order Spain to recover from the clubs the value of the benefit plus interest.

The case provides a reminder that, when benefiting from State support (in any form), companies should always ensure that it is State aid compliant. Otherwise, there is a risk of it being recovered later. At the same time, public bodies have an interest in assessing the State aid compliance of their support measures at the outset, since they can be sued for damages (for example by the beneficiaries’ competitors) if they grant illegal aid.

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

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