European Competition Law Newsletter – June 2024

June 3, 2024

Table of Contents

UK Digital Markets, Competition and Consumers Act 2024 Makes Significant Changes to Competition and Consumer Protection Law

On 24 May 2024, the UK Digital Markets, Competition and Consumers Act 2024 (DMCC Act) became law. The DMCC Act, likely to become operable in Q4 2024, introduces significant changes to UK competition and consumer protection law, which will impact a wide range of businesses active in the UK.

Three principal areas are impacted by the DMCC Act: digital markets; merger control and competition rules; and consumer protection law.

In digital markets, the DMCC Act introduces the strategic market status (SMS) regime. This is a UK version of the EU Digital Markets Act.

Under this regime, the UK Competition and Markets Authority (CMA), through its Digital Markets Unit (DMU), can designate an activity of a digital company as having SMS if the company has “substantial and entrenched market power” and “a position of strategic significance” with respect to that digital activity in the UK. Only companies above a total worldwide or UK turnover threshold can be designated.

A number of obligations will apply to companies that are subject to SMS designation, the cornerstone of which is that the CMA will impose bespoke codes of conduct to regulate behaviour in relation to a covered activity. The CMA will have very wide discretion, but the underlying principles for these codes, set out in the DMCC Act, are fair dealing, open choices, and trust and transparency.

Although only a limited number of large tech companies will fall within the regime, any company that advertises, buys or sells online should be interested in its implementation. Such companies can make representations to the CMA incuding why a sector should be considered a priority.

The changes to the merger control and competition rules apply to all companies. There is now an additional merger control jurisdictional test in the UK, which applies when the target has a UK nexus and one of the parties has an existing share of supply of 33% in the UK and a UK turnover of at least £350 million. This is, therefore, an acquirer-focussed test aimed at catching so-called “killer acquisitions.”

The act also increases the existing jurisdictional test focussing on a target’s UK turnover from £70 million to £100 million while leaving unchanged the other existing jurisdictional test that requires an overlap in the UK and a combined share of supply of 25%. There is also now a formal de minimis exemption for small acquisitions.

The changes to the general competition rules are largely procedural or technical, but generally increase the powers available to the CMA to enforce the law, including in relation to its geographic reach.

Also applying across the board — and arguably of even greater impact — are the changes to consumer protection law. The CMA gains powers to enforce consumer protection law that are broadly equivalent to those it has in the competition field. It will therefore have direct enforcement powers for the first time and the ability to sanction breaches with fines of up to 10% of worldwide turnover.

These powers will apply to existing consumer rules, including those covering unfair contract terms in consumer contracts and unfair commercial practices. New rules introduced by the DMCC Act cover subscription contracts, drip pricing, fake reviews and consumer savings schemes.

Any consumer-facing businesses active in the UK should consider the impact of the DMCC Act and review their consumer protection law compliance policies. The CMA is keen to use its new consumer protection powers and sees the changes introduced by the DMCC Act as extremely important in simplying the enforcement process.

More EU Fines for Restrictions on Cross-Border Trade

The European Commission remains committed to enforcing breaches of EU competition law arising out of unjustified restrictions on cross-border trade in the EU. The latest example came on 23 May 2024, when the Commission announced a fine of €337.5 million against Mondelēz International, Inc. This case serves as another warning to companies active in the EU, dominant or not, to check their contracts and practices and to carry out compliance activities such as audits to ensure compliance.

The case concerned restrictions and unilateral behaviour in relation to chocolate, biscuits and coffee products. According to the Commission, the aim was to stop cross-border trade in the EU (parallel trade), which could lead to price decreases in countries with higher prices.

The Commission identified and sanctioned a range of well-recognised problematic activities. The company was found to have agreed with some wholesale customer restrictions on the territories or customers to which they could resell Mondelēz’s products. One such agreement also included a provision ordering Mondelēz’s customer to apply higher prices for exports compared to domestic sales. In addition, 10 exclusive distributors agreed not to reply to sale requests (known as passive sales) from customers located in other member stateswithout prior permission from Mondelēz.

According to the Commission, the unilateral behaviour, amounting to an abuse of dominance, included refusing to supply a broker in one member state to prevent the resale of chocolate tablet products in other member states where prices were higher. In addition, the company ceased the supply of chocolate tablet products in one member state to prevent them from being imported into another where Mondelēz was selling these products at higher prices.

A finding of an abuse of dominance in relation to parallel trade is more unusual, but not unprecedented. Underlying this part of the decision is a finding that the company was dominant in relation to the supply of chocolate tablet products, which will in part have been based on a high market share in this product.

The amount of the fine in this case is unusual, but it reflects the fact that the infringements covered a large part of the EU, lasted over a decade and the value of sales was significant. In addition, as expressly pointed out by the Commission, the legal position was clear, and therefore the company had no excuse. The Commission said“… this type of behaviour has already been sanctioned in the past. This is really not a novel case. We have a clear case practice. We have a track-record of fighting territorial restrictions. The fact that they are illegal and violate competition rules is well established and companies need to be deterred …”

UK Court Upholds Appeal Against CMA Finding of Anti-Competitive Pharma Agreements

On 23 May 2024, the UK Competition Appeal Tribunal (CAT) overturned a 2022 CMA decision fining four pharmaceutical companies and a private equity firm for infringing UK competition law through arrangements concerning the supply of an anti-nausea drug to the UK National Health Service (NHS).

The CMA found that, from June 2013 to July 2018, Alliance Pharmaceuticals, Focus and Lexon were involved in an arrangement that restricted competition in the supply of prochlorperazine 3mg dissolvable or “buccal” tablets to the NHS. Another company, Medreich, was involved in the arrangement between February 2014 and February 2018. Prochlorperazine is an important drug used to treat nausea, dizziness and migraines.

Under the arrangement, according to the CMA, Alliance appointed Focus as its distributor, and Lexon and Medreich were paid a share of the profits that Focus earned by selling Alliance’s product. In return, Lexon and Medreich agreed not to compete in the supply of these prochlorperazine tablets in the UK, although, before entering into this arrangement, Lexon and Medreich had been taking steps to launch their jointly developed version of prochlorperazine.

In a remarkable judgment, the CAT found that the CMA had made “material errors” in its assessment of the evidence. The alleged overall “market exclusion agreement” entered into by Alliance, Lexon, Focus and Medreich simply “did not exist.” Instead, the parties had entered into distribution agreements for their own individual commercial reasons. In particular, Alliance entered into an amended distribution agreement with Focus as part of a unilateral strategy to meet the generic threat.

As a result of this finding, separate director disqualification proceedings brought by the CMA against seven individuals involved in the alleged infringements were found to have no basis and were dismissed by the CAT.

The CAT’s judgment shows that the basic facts underlying any alleged case of competition law infringement must be considered in detail. A regulator such as the CMA may have suspicions that companies have engaged in illegal activity, but there is no substitute for an investigation and good understanding of the real-world commercial arrangements and rationale.

EU Policy Brief on Competition Law and Labour Markets

As in other jurisdictions, there is a focus in the EU (and UK) on anti-competitive practices in labour markets that infringe competition law. The European Commission is investigating such cases and recently carried out unannounced inspections (dawn raids) in the sector of online ordering and delivery of food, groceries and other consumer goods involving, among other arrangements, a suspected no-poach agreement.

There is also significant activity at the member state level, including the recent issue of a statement of objections (preliminary statement of case) by the Portuguese Competition Authority concerning alleged no-poach agreements in the technology consulting sectors. According to the regulator, the agreements may include commitments not to hire or make unsolicited offers to employees of competing companies.

Unlike its EU member state countparts, the Commission has not yet adopted a decision concerning a self-standing labour market agreement. Nevertheless, in an effort to raise the profile of this issue, on 3 May 2024 it issued a briefing outlining how labour market agreements should be dealt with under EU competition law.

The briefing explains that both wage-fixing and no-poach agreements will in most cases qualify as restrictions by “object” under EU competition law (i.e., automatic infringements). The Commission also takes the view that such restrictions are generally unlikely to meet the requirements for an exemption on the basis that the pro-competitive effects outweight the anti-competitive impact.

Although they will usually not meet the necessary requirements to qualify as “ancillary restraints,” the briefing suggests that in some cases no-poach and wage-fixing agreements may do so.

Under the ancillary restraints principle, an anti-competitive restriction can be acceptable if it is an essential part of a wider pro-competitive or neutral arrangement. The briefing identifies two cases in which this potentially could apply. In a research joint venture, the parties may argue that they would only assign key personnel to the joint venture if they were sure that the other party would not poach the best employees. Similarly, parties to a potential vertical supply relationship may argue that, without a no-poach agreement, they would not enter it.

In both examples the parties may argue that without the wage-fixing or no-poach agreement, they would risk (i) losing the investment they made in training their employees, and (ii) losing possible non-patent intellectual property rights, such as trade secrets, developed by or learned by the relevant employees, (iii) being unable to fulfil their obligations under the main transaction due to the lack of staff.

Additional EU and UK competition law news coverage can be found in McGuireWoods’ news section.

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