European Competition Law Newsletter – February 2019

February 1, 2019

Table of Contents

  • Resale Price Maintenance Rules Apply to Members of Purchasing Cooperative
  • UK Case Shows Scope of Merger Rules and Importance of the Counterfactual
  • UK Court Analyses Restrictions Imposed by Online Portal
  • Mastercard Fined for Restricting Cross-Border Access

Resale Price Maintenance Rules Apply to Members of Purchasing Cooperative

On 29 January 2019, the German competition authority, the Bundeskartellamt, imposed a fine of €13.4 million on ZEG, a purchasing cooperative. The case shows that just because companies cooperate in purchasing does not mean they can fix downstream resale prices to customers. That will be treated as illegal resale price maintenance (RPM).

ZEG, a cooperative of around 960 independent European bicycle retailers, has a strong market position in Germany on both the purchase and sale sides. ZEG purchases bicycles from third parties and sells these to its retailer members. These are both its own-branded bicycles and certain models of other manufacturers sold exclusively by ZEG.

The case concerned agreements between ZEG representatives and 47 bicycle retailers in Germany. The retailers agreed not to undercut the minimum sales prices (also referred to as “low price”) set by ZEG for seasonal bikes (including ZEG’s brands and the models of other manufacturers sold exclusively by ZEG). ZEG representatives checked adherence to the resale prices, and retailers that undercut the prices were asked to adhere to them.  

The Bundeskartellamt treated this as RPM (i.e., vertical price fixing) and commented that ZEG had “created a situation similar to a sales cartel among the participating retailers.” This was therefore a significant competition law infringement deserving a large fine.

Cooperatives — purchasing or otherwise — need to ensure compliance with the competition law rules. Cloaking something under another guise, such as “cooperative” or “joint venture,” does not provide immunity from competition law.  

UK Case Shows Scope of Merger Rules and Importance of the Counterfactual

A recent UK merger control clearance shows the scope of coverage of merger control rules. At the same time, in applying a version of the “failing firm defence,” the decision demonstrates that the position in the absence of the transaction (the counterfactual) is crucial to the analysis.

The transaction, cleared on 21 December 2018, concerned the acquisition by Aer Lingus of scheduled passenger flights previously operated by CityJet on the route from London City Airport to Dublin. This was a so-called wet lease, under which CityJet provides Aer Lingus with aircraft, crew, maintenance services and insurance to operate the route. Aer Lingus also acquired CityJet’s landing slots at both London City and Dublin airports. Customers who had already booked flights on the route were also transferred to Aer Lingus, and CityJet’s website redirected potential new customers to the Aer Lingus homepage following the agreement’s announcement.

Merger control generally applies to the acquisition of a business that generates sales, but the scope of this is broad in many jurisdictions worldwide. This case shows that all the elements must be analysed together to determine whether a business has, in fact, been transferred. Some surprising types of transaction will be caught as a “merger” in various countries and may therefore need to be filed for approval (even where substantive issues do not arise).

If filed for approval, the situation arising from the acquisition is considered against the counterfactual. This is usually the status quo, but it does not have to be. The “failing firm defence” is a counterfactual argument, in which it is broadly said that the transaction changes nothing since the target was going out of business anyway and the purchaser would have picked up its customers.

A version of this was applied in the CityJet case. The regulator found that CityJet had taken the decision to stop providing services on this route prior to its agreement with Aer Lingus, and no other airline would have been interested in taking over the business. Therefore, without the agreement, the assets transferred by CityJet to Aer Lingus would have been used instead to operate other routes, resulting in a loss of capacity and, therefore, less choice for customers on the London-to-Dublin route.

UK Court Analyses Restrictions Imposed by Online Portal

On 24 January 2019, in an unusual case, the English Court of Appeal (CA) had the opportunity to analyse a competition law claim from first principles. The judgment is a useful example for potential claimants and defendants (and their advisers) of how a court reviews these types of claims.

The case related to an online UK property sales portal, OnTheMarket, launched by Agents’ Mutual Limited in January 2015. At the time, there were only two major portals in the UK — Rightmove, which was the market leader, and Zoopla, which traded using the brand Primelocation and under its own name.

Agents’ Mutual was established by a number of estate agents. The documents establishing the business laid down three rules: the “One Other Portal Rule,” the “Bricks and Mortar Rule” and the “Exclusive Promotion Rule.” The One Other Portal Rule stipulated that a member could list its properties on no more than one other portal. The Bricks and Mortar Rule restricted membership of the portal to full-service, office-based estate or letting agents, as opposed to those operating only an online business model. The Exclusive Promotion Rule required members to promote only on OnTheMarket and no other portal, but was not considered in the CA case.  

The CA was considering, on appeal from a lower court, a challenge to the rules by an estate agent member of Agents’ Mutual called Gascoigne Halman. In an unusual detailed review of the law by a UK court, the CA found that the One Other Portal Rule was not a restriction of competition law “by object” (i.e., not an automatic restriction). The CA went right back to the basics of the law in this area. Referring to previous case law, it held that, given the rule’s nature and the specific legal and economic context, particularly including Agents’ Mutual’s lack of market power, the rule did not reveal a sufficient degree of harm to competition such that it could be regarded, by its very nature, as harmful to the proper functioning of normal competition. The rule was ambivalent in terms of its effects on competition and could not be treated as an object restriction. The same was true in relation to the Bricks and Mortar Rule.

The case shows that, when analysing restrictions and considering how a court might view them from the competition law point of view, it is advisable to consider the issue from first principles. In this case, as ever, the level of market power was crucial. The CA commented that the absence of market power was directly relevant to whether the One Other Portal Rule was itself harmful to competition.” Given that OnTheMarket was a startup facing much-larger players, it was always going to be difficult for Gascoigne Halman to argue successfully that the provisions were anti-competitive.

Mastercard Fined for Restricting Cross-Border Access

On 22 January 2019, the European Commission fined Mastercard €571 million for limiting the possibility for merchants to benefit from better conditions offered by banks established elsewhere in the EU. This shows once again the Commission’s focus on ensuring EU market integration and that it will come down hard whenever companies illegally seek to divide the market along national borders.

Mastercard is the second-largest card scheme in the European Economic Area (EEA) in terms of consumer card issuing and value of transactions. When a consumer uses a debit or credit card in a shop or online, the retailer’s bank (the “acquiring bank”) pays a fee called an “interchange fee” to the cardholder’s bank (the “issuing bank”). The acquiring bank passes this fee on to the retailer, who includes it, like any other cost, in the final prices for all consumers, even those who do not use cards.

Mastercard’s rules obliged acquiring banks to apply the interchange fees of the country where the retailer was located. Prior to 9 December 2015, interchange fee countries could not benefit from lower interchange fees offered by an acquiring bank located in another Member State. This led, the Commission found, to higher prices for retailers and consumers, to limited cross-border competition and to an artificial segmentation of the EU single market, and was therefore illegal.

The other interesting aspect of the case is that the start date of the infringement found by the Commission appears to have been set as the point at which it considered Mastercard should have known that the arrangement was illegal. That is an argument available to companies generally where there is uncertainty or an activity is novel, although it will not always be a complete defense.

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

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