Table of Contents
- European Commission Investigates Restrictions on Sales of Branded Clothing in the EU
- UK Competition Appeal Tribunal Upholds Excessive-Pricing Decision
- First UK Judgment Under Subsidy Control Act 2022
- Two More Below-Threshold Acquisitions to Be Reviewed Under EU Rules
European Commission Investigates Restrictions on Sales of Branded Clothing in the EU
On 31 July 2023, the European Commission announced that it had sent a statement of objections, a preliminary statement of case, alleging that fashion house Pierre Cardin and its licensee Ahlers may have infringed EU competition law through their distribution and licensing practices.
The Commission alleges that the two companies agreed and acted together to restrict the ability of other Pierre Cardin licensees and their customers to sell Pierre Cardin-licensed clothing, both offline and online: (a) into Ahlers’ licensed EU countries; and/or (b) to low-price retailers, such as discounters, offering lower prices to customers in those countries. The intention behind this was to ensure that Ahler had “absolute territorial protection” in its licensed EU countries.
Absolute territorial protection is a practice by manufacturers or suppliers, relating to the resale of their products and leading to a separation of markets or territories in the EU. Under absolute territorial protection, a single distributor obtains the rights from a manufacturer to market a product in a certain territory, and other distributors are prohibited from selling actively (using active sales efforts) or passively (simply responding to requests) into this territory. This often gives rise to an infringement of EU competition law and puts the parties at risk of fines.
The case shows the Commission is still interested in taking action against practices that partition the EU single market and in relation to traditional manufactured consumer goods. Competition compliance programmes, training and audits are recommended for any company, whatever its industry and size, to reduce the risk of an infringement of the law.
UK Competition Appeal Tribunal Upholds Excessive-Pricing Decision
In a landmark judgment, on 8 August 2023, the UK Competition Appeal Tribunal (CAT) upheld a 2021 decision by the UK Competition and Markets Authority (CMA) to fine Advanz Pharma and two private equity houses for infringing UK competition law through excessive pricing of a medicine sold to the UK National Health Service (NHS).
The CMA found that, from 2009 until 2017, Advanz, the sole supplier, charged excessive and unfair prices for liothyronine tablets, which are used to treat thyroid hormone deficiency. The company achieved this because the tablets were among a number of drugs that, although genericised, faced limited or no competition. The strategy, which began in 2007, resulted in an overall price increase for liothyronine tablets of more than 6,000%.
The price increases were not driven by any meaningful innovation or investment, volumes remained broadly stable, and the cost of producing the tablets did not increase significantly. NHS spending on the tablets in 2006, the year before the implementation of the strategy, was £600,000, but by 2009 had increased to more than £2.3 million and jumped to more than £30 million by 2016. The pack price went from £20 to £248 between 2009 and 2017.
The CMA fined the firms involved a total of over £100 million for the relevant periods in which they broke the law. In addition to Advanz (£40.9 million), these were HgCapital (£8.6 million) and Cinven (£51.9 million), both of which were previously owners of the businesses now forming part of Advanz.
Before the CAT, the companies disputed that the prices charged for liothyronine tablets were excessive and unfair and sought to overturn the fines imposed by the CMA. However, in a unanimous judgment, the CAT upheld the CMA’s decision, finding that the price increases were part of a deliberate strategy to exploit the lack of regulatory or competitive constraints and resulted in a significant impact on the NHS. The CAT did, however, reduce the fines the CMA imposed on Cinven and HgCapital.
The CAT judgment is an important analysis of the law relating to excessive and unfair pricing and therefore of relevance to any company facing high prices from a potentially dominant supplier. The companies involved also may face civil claims by the NHS for compensation.
First UK Judgment Under Subsidy Control Act 2022
On 27 July 2023, the UK CAT handed down the first judgment of a UK court reviewing a subsidy decision under the UK Subsidy Control Act 2022.
The Subsidy Control Act, which came into effect on 4 January 2023, established a new system of subsidy oversight and control within the UK to replace the EU State Aid regime, to which the UK is no longer subject following its exit from the EU. The system operates alongside the UK’s obligations under its free trade agreements with other countries, notably the provisions of the UK-EU Trade and Cooperation Agreement, and the World Trade Organization rules on subsidies, as well as the relevant provisions within the Northern Ireland Protocol also agreed with the EU.
The case concerned the collection and disposal of household and commercial waste by Durham County Council, a local authority. The council uses the same vehicles and the same employees to collect all household waste and the majority of commercial waste it collects. It generally is not entitled to charge for the former service, but is obliged to charge for the latter.
Durham Company Limited, which trades under the name Max Recycle, is a provider of waste collection services and competes with the council in relation to the collection and disposal of waste. Max Recycle contended that the council was permitting its household waste collection operation to subsidise its commercial waste collection operation, thereby permitting the council to charge individual businesses at less than the rate that it would or could have charged had it run the commercial waste collection operation as an altogether separate, self-standing and independent operation.
The CAT noted that the giver of the alleged subsidy was the same person as the person on whom the subsidy was conferred (i.e., the council in both cases). Accordingly, there was no “subsidy” within the meaning of the Subsidy Control Act. Any advantage did not involve subsidisation, because the “economic benefit” simply circulated within one entity. Further, the natural reading of the definitions of “public authority” and “enterprise” in the Subsidy Control Act mean that when a person has been designated a “public authority” (potentially granting a subsidy), that person cannot also be (as is required) a separate enterprise (potentially receiving a subsidy) in relation to an alleged advantage under consideration. That differs from the position under EU state aid law, under which an entity can operate in different economic capacities and therefore potentially subsidise itself.
Although the council had made a decision potentially subject to the Subsidy Control Act, the subsidy control principles in the law therefore did not apply to that decision.
In addition, the CAT held that it could not identify an economic advantage, which in theory could have been provided. It considered that, at most, the “economic advantage” is the ability to charge less to the consumers of the service provided by any “enterprise,” that is, those using the council’s commercial waste collection services. That economic advantage arises only if the enterprise charges less than the full economic cost of the commercial waste collection service calculated on a stand-alone basis. If the enterprise does so reduce its charges, the economic benefit is sustained by the consumer and not the enterprise. Only if the enterprise charges the full amount will it be obtaining an economic advantage. However, the CAT concluded, “if it does so, then the very mischief that Max Recycle is alleging arguably vanishes, because there no advantage is conferred.”
While Max Recycle was unsuccessful in this case, it shows the possibilities open to third parties that may want to challenge a potential illegal subsidy to a competitor in the UK under the Subsidy Control Act. The appeal was lodged before the CAT on 3 February 2023, with the judgment coming under six months later. The case also featured an interim cost-capping judgment from the CAT, which set very low amounts (this has been appealed). This is in line with the CAT’s stated desire for appeals under the Subsidy Control Act, which are anticipated to become very numerous, to be “fast, cheap and simple.”
Two More Below-Threshold Acquisitions to Be Reviewed
Under EU Rules
Showing once again the increased regulatory risk to mergers and acquisitions in the EU, the European Commission has claimed jurisdiction over two more “below threshold” transactions under the EU merger control rules.
The Commission has the power under EU merger control law — Article 22 of the EU Merger Regulation (EUMR) — to accept referrals of transactions from a national regulator in the EU, following which the Commission conducts its own review under the EUMR in place of that regulator. Pending the Commission’s decision, such transactions cannot be closed.
On 26 March 2021, the Commission published Article 22 Guidance, changing its policy to accept referrals even where the transaction did not meet national merger-control jurisdictional thresholds (i.e., below-threshold transactions).
The first such case accepted by the Commission following the change of policy, which is still subject to various appeals and remains highly controversial, was Illumina’s proposed acquisition of GRAIL. The transaction did not reach the notification thresholds set out in the EU Merger Regulation, as GRAIL did not make any sales in the EU and it was also not notified in any EU member state. Nevertheless, citing in particular the $7.1 billion purchase price for a small company, the Commission accepted referrals from various EU member states and reviewed the transaction.
The first of the recent cases is Qualcomm’s proposed acquisition of Autotalks. Fifteen EU member states submitted requests, which the Commission accepted on 18 August 2023. Qualcomm is the well-known U.S.-based semiconductor manufacturer, while Autotalks is an Israeli semiconductor manufacturer specializing in V2X semiconductors (seen as key to improving road safety, traffic management and reducing CO2 emissions, as well as for the deployment of autonomous vehicles). The proposed acquisition again does not reach the notification thresholds set out in the EUMR and is not notifiable in any member state. The Commission determined that the referral requests should be accepted because the transaction would combine two of the main suppliers of V2X semiconductors in the EU.
In the second of the recent cases, announced just one working day later, on 21 August 2023, the Commission accepted the requests submitted by three EU member states to assess the proposed acquisition of Nasdaq’s European power trading and clearing business by European Energy Exchange AG (EEX). Once again, the proposed acquisition does not reach the notification thresholds set out in the EUMR and is not notifiable in any member state. Nevertheless, the Commission stated that it “appears to combine the only two providers of services facilitating the on-exchange trading and subsequent clearing of Nordic power contracts.” This raised important issues because such services allow for the use of long-term energy contracts with set future prices and are therefore key for more stable and predictable energy prices, to the ultimate benefit of consumers and businesses.
These three referrals show the potentially wide range of below-threshold deals that may be deemed suitable for a review under the EUMR despite not qualifying for a filing in any EU member state or under the EUMR. The March 2021 guidance expressly referred to transactions in the digital services and pharmaceutical sectors as being potentially suitable. llumina/GRAIL concerns cancer detection tests, which is at most neighbouring to pharmaceuticals. While semiconductors, at issue in Qualcomm/Autotalks, are clearly a crucial product, the target in that case (Autotalks) is a fabless manufacturer based in Israel and must, by definition, have limited sales in the EU. EEX/Nasdaq Power concerns a business area outside either of those identified sectors (services relating to power trading and clearing). Companies contemplating deals — even if the target, merger partner or joint venture has no sales in the EU — should always consider the potential application of Article 22 of the EUMR, if only to rule it out as a theoretical possibility.
Additional EU and UK competition law news coverage can be found in McGuireWoods’ news section.
Additional EU and UK competition law news coverage can be found in McGuireWoods’ news section.