Another Reminder That the UK Merger Control Regime Is More Than Just Voluntary

On 6 August 2019, the UK’s Competition and Markets Authority (the “CMA”) imposed an ‘Unwinding Order’ on a U.S. company, Bottomline Technologies (de), Inc (“Bottomline”), active in the business payment automation technology space, and its UK subsidiary (“Bottomline UK”), in connection with its investigation into Bottomline’s completed acquisition of Experian Limited’s Experian Payments Gateway business (the “EPG Business”). The acquisition was completed on 6 March 2019.

An ‘Initial Enforcement Order’ or ‘IEO’, preventing further integration, had already been imposed on Bottomline and Bottomline UK on 22 May 2019.

The Unwinding Order imposes obligations in relation to the handling of information:

  • Bottomline must not use “EPG Confidential Information” (i.e. commercially sensitive information regarding the EPG business) to “solicit” any existing EPG customers in relation to any product or service that competes with the EPG business;
  • Bottomline and Bottomline UK must “segregate” all EPG Confidential Information (including existing physical and electronic materials) and ensure that such information cannot be accessed by any Bottomline and Bottomline UK representatives or employees other than certain EPG staff, except where necessary to comply with regulatory and/or accounting obligations or with the prior written consent of the CMA;
  • Bottomline and Bottomline UK must procure that EPG staff destroy or delete any “Bottomline Confidential Information” (i.e. any commercially sensitive information regarding the Bottomline business in respect of any products or services that compete with the EPG business) that they hold; and
  • Bottomline and Bottomline UK must procure that no EPG staff have access to Bottomline Confidential Information, except with the prior written consent of the CMA.

The Unwinding Order remains in force until it is varied or revoked.

This matter reminds us of the risks inherent in proceeding to complete a transaction without having obtained CMA clearance, i.e. the risks of the CMA investigating a transaction (that has been legally completed) and imposing disruptive measures pending the outcome of its investigation. At a more general level, the difficulties of reversal are relative to the scale of implementation and would be far more difficult for instance if employee’ contracts have been terminated, or supply/customer contracts novated or terminated. A careful assessment of whether to voluntarily notify the CMA of a transaction prior to completion should therefore be conducted in respect of transactions involving overlapping businesses in the UK.

No Signs of Slowing Down — Global Antitrust Agencies Focus on Big Tech

Earlier this year, we covered the widespread interest in tech giants among international competition authorities, as well as the potential for divergence in intensity and type of enforcement across jurisdictions. We observed that while the U.S. enforcement agencies did not appear to support a regulatory approach to platforms and the digital economy, others like the Australian Competition and Consumer Commission (ACCC) and the UK Parliament’s Digital Culture, Media and Sport Committee may have a stronger appetite for proactive regulation.

Since that post, competition authorities, both U.S. and other, have intensified their focus, with activities ranging from sector-wide studies to investigations into individual tech companies.

For example, the U.S. Department of Justice Antitrust Division (DOJ) recently announced a broad review of whether online tech companies have harmed consumers or otherwise reduced competition. The probe will cover leading online platforms in “search, social media, and some retail services” and will focus on “practices that create or maintain structural impediments to greater competition and user benefits.”

That DOJ announcement is part of a broader effort by the U.S. antitrust enforcement agencies to address competition in the tech sector. Days later, the Attorney General met with eight State AGs who reportedly are considering opening their own investigations. The FTC launched a tech task force back in February (in addition to its recently concluded hearings on competition and consumer protection) and last month opened a formal antitrust investigation into Facebook (according to a recent press release accompanying Facebook’s Q2 earnings report). Reports also have emerged of FTC information requests to third-party resellers on Amazon. Even the Antitrust subcommittee of the U.S. House Committee on the Judiciary has held a hearing on online platforms and market power as part of its separate investigation.

The U.S. agencies’ overseas counterparts have remained just as active. In Australia, the ACCC just published the Final Report from its Digital Platforms inquiry. The inquiry focused on online search engines, social media platforms and other digital content aggregation platforms with an emphasis on Facebook and Google, and looked into the impact of digital platforms on competition in the advertising and media markets, and on advertisers, media content creators and consumers.

The final report found that Google has “substantial market power” in the supply of general search services and search advertising services in Australia, and that Facebook has “substantial market power” in the supply of social media services and display advertising services in Australia. Both companies were found to have “substantial bargaining power” in their dealings with news media businesses in Australia. The report cautioned that this market power could be used to damage the competitive process, though it did not look at whether these digital players have in fact misused their market power.

The report offered 23 recommendations “aimed at addressing some of the actual and potential negative impacts of digital platforms in the media and advertising markets, and also more broadly on consumers.” The recommendations most directly implicating competition include changing merger law to incorporate additional factors – such as the likelihood that the acquisition would result in the removal of a potential competitor from the market, and the nature and significance of assets, including data and technology, being acquired – and to require advance notice of acquisitions; and creating a new, specialist digital platforms branch within the ACCC to monitor and investigate proactively instances of potentially anticompetitive conduct by digital platforms and take action to enforce competition and consumer laws.

The report also recommended changes to Australia’s Privacy Act, including expanding the definition of “personal information” to include technical data, strengthening notification and consent requirements and pro-consumer defaults, enabling the erasure of personal information, and introducing direct rights of action and higher penalties for breach, as well as establishing an ombudsman scheme to resolve complaints and disputes with digital platform providers. Additional recommendations focused specifically on news media (e.g. creating a code of conduct to promote fair and transparent treatment of news media by digital platforms, improving digital media literacy in schools and the communities, and offering greater funding for public broadcasters and local journalism).

Similar undertakings are in the works around the globe. The ACCC report comes just as the UK Competition and Markets Authority (CMA) announced the start of a formal market study into online platforms and the UK market for digital advertising. The study will examine three potential sources of harm in digital advertising: (1) The market power of online platforms in consumer-facing markets – to what extent online platforms have market power and what impact this has on consumers; (2) Consumer control over data collection practices – whether consumers are able and willing to control how data about them is used and collected by online platforms; and (3) Competition in the supply of digital advertising in the UK – whether competition in digital advertising may be distorted by any market power held by platforms. Platforms not funded by digital advertising are expressly outside the scope of the study.

In keeping with what appears to be a greater openness toward proactive regulation than the U.S. agencies (at least historically), the discussion of potential remedies in the CMA’s Statement of Scope explains that the “current expectation is that any remedies are likely to focus on recommendations to Government for the development of an ex ante regulatory regime … and are likely to require legislative change.” The CMA does not believe that a “one-off” market investigation and intervention is “sufficient to provide a sustainable long-term framework for the sector.” The five main areas in which remedies may be required include: (1) increasing competition through data mobility, open standards, and open data; (2) giving consumers greater protection over data; (3) limiting platforms’ ability to exercise market power; (4) improving transparency and oversight for digital advertisers and content providers; and (5) institutional reform. The CMA plans to publish an interim report with initial findings in January 2020, with a final report to follow no later than July of next year.

Not to be outdone, the EU – which recently has been fairly active in the tech sector, including last year’s highly publicized Google Android decision – recently announced a formal investigation into Amazon. The investigation focuses on Amazon’s role as both a platform provider (through Amazon marketplace) and a participant on that platform (through its first-party retail offerings), asking whether Amazon’s use of sensitive data from independent retailers is in breach of EU competition rules. Specifically, the Commission will look into (1) the standard agreements between Amazon and marketplace sellers, which allow Amazon’s retail business to analyze and use third-party seller data; and (2) the role of data (including competitively sensitive marketplace seller data) in selecting the winners of the “Buy Box,” which allows customers to add items directly to their shopping carts and accounts for the majority of Amazon transactions.

As we cautioned previously, with so many competition authorities weighing in on how to assess tech competition, this confluence of inquiries and investigations can pose a challenge for global enterprises operating under an international patchwork of approaches. Technology-focused, data-intensive businesses should consider seeking antitrust counsel to monitor developing competition trends and implications across jurisdictions.

Companies, Board Members and Officers Take Note: U.S. Antitrust Agencies Are Focused on Interlocking Directorates

The FTC and the DOJ Antitrust Division have again warned companies, along with their board members and officers, of the legal prohibition on interlocking directorates: when an individual, or an organization’s agent(s), simultaneously serves as an officer or director of two competing companies. In a recent FTC blog, and prior post, the agency flagged the importance of monitoring for interlock issues during standard antitrust compliance. The DOJ Antitrust Division likewise recently made clear in remarks by Assistant Attorney General Makan Delrahim and Principal Deputy Assistant Attorney General Andrew Finch, that it, too, is closely monitoring interlocks, particularly during transaction reviews. In-house counsel, board members and executive officers must routinely monitor interlock issues, or risk an independent government investigation or side investigation to an M&A review.

The Law

Section 8 of the Clayton Act, 15 U.S.C. § 19, prohibits “interlocking directorates.” The concern is that officer or director interlocks between competitors could result in inappropriate coordination or the sharing of competitively sensitive information, in violation of antitrust laws. The purpose of Section 8 is therefore to “nip in the bud incipient violations of the antitrust laws by removing the opportunity or temptation to such violations through interlocking directorates.” U.S. v. Sears, Roebuck & Co., 111 F. Supp. 614, 616 (S.D.N.Y. 1953).

Q: Which positions are covered?

A: “Director” means a member of the board of directors, and “officer” means a position elected or chosen by the board. The prohibition applies not only to the same individual serving as an officer and/or director of two competing companies but also to entities (like private equity firms) that have their agent(s) or representative(s) serving in these roles.

Q: Which entities are covered?

A: While the statute specifically refers to interlocks among “corporations,” DOJ Antitrust Division AAG Delrahim recently signaled a willingness to enforce Section 8 against unincorporated entities such as LLCs, as the potential harm is “the same regardless of the forms of the entities.” The FTC has taken similar positions in, for example, investigating interlocks involving banks, which Section 8 exempts, and competing non-bank corporations.

Q: What are “competitive sales”?

A: “Competitive sales” are “the gross revenues for all products and services” sold by one company in competition with the other, “determined on the basis of annual gross revenues for such products and services in [the company’s] last completed fiscal year.” Companies are “competitors” if an agreement between them would violate antitrust laws. 15 U.S.C. § 19(a)(1)(B), (a)(2). The FTC has advised companies to look at their ordinary course business documents and to speak to knowledgeable employees in determining if two companies compete.

Q: Is there a grace period for compliance?

A: If an interlock did not violate Section 8 at the time it was established but, later, changed circumstances cause a prohibited interlock (such as two companies that previously did not compete becoming competitors), the companies or individuals will have one year to cure. During that time frame, parties must remember that other antitrust laws still apply.

When an interlock violates Section 8 from the time it was established, there is no grace period to cure.

The Risks

Section 8 violations are inherently illegal and do not require proof that the interlock resulted in harm to competition. The government’s remedy for a Section 8 violation is injunctive relief—elimination of the offending interlock, typically with an officer or director’s resignation. But any interlock — in violation of Section 8 or not—could give rise to claims under other antitrust laws. Section 1 of the Sherman Act prohibits combinations and conspiracies in restraint of trade, and Section 5 of the FTC Act prohibits unfair or deceptive acts in restraint of commerce. The FTC has stated it may use Section 5 to reach interlocks that may not “technically meet” the ban in Section 8 of the Clayton Act but which the agency determines may “violate the policy against horizontal interlocks expressed in Section 8.” Private plaintiffs also could bring a Sherman Act claim for treble damages.

A New Twist in the Micula Case

The Micula case refers to what started as an intra-EU arbitration dispute between two Swedish investors and Romania and might end—or not—as a State aid case. After the recent EU judgment of June 2019, which marks a new twist, the fate of this case from a State aid perspective remains at least partially undecided.

Background of the Micula case

In the late ’90s, the Romanian government wanted to attract investors to help Romania’s economy grow, especially in the poorer regions of the country. To do so, it inter alia enacted the Emergency Government Ordinance 24/1998 (“EGO 24”) later amended by Emergency Government Ordinance 75/2000 (“EGO 75”) which made available certain tax incentives to investors in certain disfavored regions of Romania and was expected to last 10 years.

Relying on this favorable scheme, the Micula brothers, two Swedish nationals, invested heavily in the Ştei-Nucet Drăgăneşti region in northwestern Romania.

However, in 2005, on the eve of its accession to the EU, Romania abolished almost all the tax incentives in an effort to comply with the EU acquis communautaire and especially State aid rules.

The Micula brothers brought a claim against Romania grounded on the violation of the “fair and equitable treatment” clause of Article 2§3 of the Sweden-Romania Bilateral Investment Treaty (hereafter, “BIT”) before an arbitral tribunal. The EU Commission intervened as amicus curiae in these proceedings. In essence, its position was that the EGO 24 incentives constituted incompatible State aid, and that any ruling reinstating the privileges or compensating for their loss would lead to the granting of new aid incompatible with the Treaty on the Functioning of the European Union. In 2013, the arbitral tribunal ruled in favor of the Micula brothers and ordered Romania to compensate the tax break losses for the 2005–2009 period for an amount of EUR 178 million, interest included.

Two years later, in a 2015 decision, the EU Commission found that the implementation of the compensation award by Romania was in breach of EU State aid rules. The Commission thus ordered full recovery from the Micula brothers.

This decision was appealed before the EU General Court which issued its judgment on June 18, 2019.

The General Court ruling

When traditional principles of law enforcement over time are called to the rescue

The claimants argued the Commission’s lack of competence and the inapplicability of EU law to a situation that predated Romania’s accession to the EU.

The General Court generally endorsed their arguments. It first pointed that EU law became applicable in Romania only after its accession to the EU on 1 January 2007, at which date the Commission acquired competence to apply EU rules to Romania. The General Court then determined that the date on which the alleged aid was granted was the date on which the right to receive compensation was acquired, i.e., the date of revocation of EGO 24 (2005). The General Court emphasized the irrelevance of the compensation award issued in 2013, after Romania’s accession to the EU, as it was simply a recognition of that right.

On this basis, the General Court concluded that the EU Commission had no jurisdiction over the amounts granted as compensation for the 2005–2007 period and exceeded its powers in State aid review by addressing the issue of damages without distinguishing the periods before or after accession.

Impact on the inapplicability of EU law to the State aid issue

On the substantive issue, there was not much left for the EU General Court to decide after the finding of inapplicability of EU law to the compensation for the period predating accession. After having recalled the well-established case law according to which compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid, the General Court logically concluded that the compensation of the withdrawal of EGO, at least for the period predating accession, could not be regarded as compensation for withdrawal of unlawful or incompatible State aid.

As the disputed decision failed to distinguish between compensation for the period predating accession and post-accession, the Court annulled the Commission Decision (EU) 2015/1470 of 30 March 2015 in its entirety.

Conclusion

While the General Court rightly quashed the EU Commission’s tendency to overly assert its competence when it comes to the State aid space, one may regret that the judgment does not address the substantive State aid issue at stake. The question of whether compensation of the withdrawal of EGO for the post-accession period constitutes State aid is hence cautiously left open by the General Court. Therefore, this judgment may possibly not put an end to the Micula saga as the EU Commission may not have had its last word.

This case, combined with the now-famous Achmea case, which has rung the death knell of investor-state arbitration clauses contained in intra-EU BITs[1], shows the potential difficulties that investors, which are incentivized by public measures, may face when they invest within the EU. Indeed, at the end of the day, they are the only ones to really bear the State aid risk and face the consequences of recovery, with relatively limited possibilities for legal recourse. This case shall remind those investors to carefully address the issue of potential State aid as part of their overall legal risk assessment.

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[1] See Declaration of the representatives of the governments of the Member States of 15 January 2019 on the legal consequences of the judgment of the Court of Justice in Achmea and on investment protection in the European Union.

DOJ Changes Course and Announces That It Will Favorably Consider “Robust” Antitrust Compliance Programs at Both the Charging and Sentencing Stages in Criminal Cases

Benjamin Franklin once observed that “an ounce of prevention is worth a pound of cure.” In the antitrust context, this means that most, if not all, companies will want as a matter of course to adopt and maintain an antitrust compliance program, because doing so will help avoid antitrust problems before they occur.

Until recently, however, the U.S. DOJ Antitrust Division gave no weight to corporate antitrust compliance programs at the charging stage of criminal cases, and provided little public guidance as to how they would be considered at the sentencing stage of such proceedings. As former Deputy Assistant Attorney General Brent Snyder noted in 2014, there were once two hard truths about compliance programs. The first was that the “existence of a compliance program almost never allows the company to avoid criminal antitrust charges.” [1] The second was that “the Division, like the Department of Justice as a whole, almost never recommends that companies receive credit at sentencing for a preexisting compliance program.” [2] That changed late last week with an important announcement by Assistant Attorney General Makan Delrahim. Delrahim described the changes to the Division’s treatment of antitrust compliance programs and also announced the publication of a Division guidance document that Division lawyers will use to apply the policy.

Prior to the policy change, a corporate compliance policy would itself garner no credit at the criminal charging stage; instead, the Division took an “all-or-nothing” approach, rewarding the first company in a cartel to come forward with leniency, and possibly advocating for criminal penalty reductions for other companies that fully cooperate in the investigation.

No longer. Going forward, a company with a “robust” compliance program (even if it is not the first to seek leniency) may be eligible for a deferred prosecution agreement (“DPA”). As Delrahim stated in his recent speech, “a company with a robust compliance program actually can prevent crime or detect it early, thus reducing the need for enforcement activity; minimizing the harm to consumers earlier and saving precious taxpayer resources” even if the compliance program is not 100% effective.

In evaluating whether a compliance program is robust, pursuant to its guidance document, the Division will ask three fundamental questions at the charging stage: (1) Is the corporation’s compliance well designed? (2) Is the program being applied earnestly and in good faith? and (3) Does the corporation’s compliance program work?

In asking and answering these three fundamental questions, the Division will consider nine factors, which the guidance document stresses are not a checklist or formula. The first factor looks to the program’s design and comprehensiveness, and considers whether the program is merely a “paper” program or whether it was designed, implemented, reviewed and revised as appropriate in an effective manner. The second factor looks to the culture of compliance, and asks whether management has clearly articulated —and conducted themselves in accordance with— the company’s commitment to good corporate citizenship. And the third factor looks to whether those with operational responsibility for the program have sufficient autonomy, authority and seniority, as well as adequate resources to implement the program. Other factors include whether the program: is tailored to the best practices of the industry and to the unique circumstances of the company; provides training and communication that is clear and empowers employees to act with confidence of the rules; requires periodic review, monitoring, and auditing; establishes reporting mechanisms to allow for anonymous or confidential reports without fear of retaliation; creates a system of incentives and discipline to ensure the program is well-integrated into the company’s operations and workforce; and implements mechanisms for self-policing, remedying issues and improving the program to prevent future issues. Although many of the factors are fairly straightforward and some reflect prior statements by agency officials, the guidance constitutes the first time in the Division’s criminal program history that it has issued formal guidance regarding how it evaluates antitrust compliance programs.

Perhaps not surprisingly, merely having a robust compliance program will not guarantee a DPA. Instead, the Division will also consider whether the company self-reported the misconduct, whether it cooperated with government investigations, and whether it took remedial action.

The new guidance document also clarifies how the Division will consider compliance programs at the sentencing stage. A company may receive a three-point reduction in its “culpability score” under the U.S. Sentencing Guidelines if it has an “effective” compliance program. However, there is no reduction if there has been an unreasonable delay in reporting illegal conduct to the government, and there is a rebuttable presumption that a compliance program is not effective when certain “high-level personnel” or “substantial authority personnel” participated in, condoned or were willfully ignorant of the offense. An effective guidance program may also avoid the need for the DOJ to recommend corporate probation. Finally, the Division’s guidance provides that a dedicated effort by the company’s senior management to change company culture after an antitrust violation and corporate actions to prevent the recurrence of an antitrust violation are relevant to whether the DOJ should recommend a criminal fine reduction.

In sum, for most companies, it has always made good sense to have, and to periodically update and review, an antitrust compliance policy. Of course, no one ever wants or expects to be involved in a criminal antitrust investigation, but in light of the Antitrust Division’s recent announcement about and guidance concerning how it will take such policies favorably into account in such investigations, it likely makes sense for many companies to dust off their programs to ensure that they are adequately robust in the eyes of the Division.

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[1] Snyder, supra note 1, at 9.

[2] Brent Snyder, Compliance is a Culture, Not Just a Policy, at 8 (Sept. 9, 2014), https://www.justice.gov/atr/file/517796/download.

DOJ Publishes Statements Clarifying Its Analysis of No-Poach Agreements – But Questions Remain

Since issuing the DOJ/FTC Antitrust Guidance for Human Resource Professionals in 2016, the DOJ Antitrust Division has remained active in enforcing and commenting on agreements among employers not to compete for hiring employees (“no-poach” agreements). DOJ filed several statements of interest in private antitrust suits involving no-poach provisions to provide guidance to the courts on the proper application of the federal antitrust laws to such restraints. Although the statements of interest provided clarity on the analysis of “naked” no-poach agreements, questions remain about the appropriate standard for analyzing no-poach restraints in franchise agreements.

Naked No-Poach Agreements Are Per Se Unlawful

DOJ recently took the unusual step of filing an unopposed motion to intervene in a class action no-poach settlement to enforce the injunctive relief agreed upon by the parties. The proposed class action alleged that a no-poach agreement between Duke/Duke University Health System and UNC/UNC Health Care System harmed competition for skilled medical labor. The named plaintiff alleged she was denied a lateral move to UNC from Duke because of agreements between senior administrators and deans at the institutions. On May 22 the court approved DOJ’s motion to intervene.

In its statement of interest, DOJ argued that such restrictions on hiring are per se unlawful market-allocation agreements between competing employers. These agreements harm consumers (employees) by depriving them of the benefits of competition that may lead to better wages or terms of employment. A court or agency will not evaluate the competitive effects of a per se unlawful agreement. Unlike such “naked” restraints, agreements that are ancillary to a separate, legitimate competitor collaboration are not considered per se unlawful and are analyzed under the rule of reason. In this case, DOJ argued that Duke had not presented evidence to show that the restraint was ancillary to a legitimate collaboration. DOJ’s analysis of the alleged agreements in its statement further cements the agency’s stance that “naked” no-poach agreements are per se unlawful. DOJ’s statement of interest sends a strong signal that it is actively monitoring no-poach cases and will readily offer its views where a party is making arguments inconsistent with the agency’s interpretation of the law. DOJ’s intervention will also deter the parties from violating the settlement and send a clear signal to others that DOJ will aggressively pursue firms that enter into naked no-poach agreements.

Questions Remain as to the Appropriate Standard for Analyzing Employment Restrictions in Franchise Agreements

Also making their way through the courts are several cases against fast-food chains alleging that franchisor agreements prohibiting poaching among franchisees are unlawful. For example, a complaint against Jimmy John’s alleged that Jimmy John’s orchestrated no-solicitation and no-hire agreements between and among franchisees. Similar claims were made against Auntie Ann’s, Carl’s Jr., Domino’s Pizza and Arby’s, among others, with some food chains settling.

DOJ filed a statement of interest in Harris v. CJ Star, LLC, Richmond v. Bergey Pullman Inc., and Stigar v. Dough Dough, Inc. In its statement, DOJ took the position that most franchisor-franchisee restraints should be analyzed under the rule of reason. It reasoned the agreement was vertical in nature because it is between a franchisor and a franchisee (parties “at different levels of the market structure”). By way of example, DOJ pointed to territorial allocations among franchises that restrict intrabrand competition but increase interbrand competition (i.e. competition among other food chains). Such restraints are evaluated under the rule of reason.

DOJ also argued that where there is “direct competition between a franchisor and its franchisees to hire employees with similar skills, a no-poach agreement between them is correctly characterized as horizontal and, if not ancillary to any legitimate and procompetitive joint venture, would be per se unlawful.” But then DOJ stated that the hub-and-spoke nature of the franchise agreement was an ancillary restraint because “the typical franchise relationship itself is a legitimate business collaboration in which the franchisees operate under the same brand.” According to DOJ, if the no-poach agreements are reasonably necessary to the franchise collaboration and not overbroad, they constitute an ancillary restraint subject to the rule of reason.

By contrast, the Attorney General of Washington took the position in an amicus brief that franchise agreements that “restrict solicitation and hiring among franchisees and a corporate-owned store” should be analyzed as per se unlawful, at least under state law. The AG argued that these agreements have both vertical and horizontal characteristics. Given the horizontal component, the AG took the position that such agreements do not warrant analysis under the more lenient rule of reason. The AG further argued that franchisors have “a heavy burden” in showing that these restraints can be justified as ancillary to a legitimate collaboration. The American Antitrust Institute similarly critiqued DOJ’s approach in a letter. It argued that the franchise no-poach agreements at issue are not ancillary because “[a]greements that have no plausible justifications or cognizable efficiencies are never ancillary” since they “do not hold the promise of procompetitive benefits and are not ‘necessary’ to the broader integration.”

Courts hearing the fast-food cases will have to resolve these conflicting arguments as they consider various motions to dismiss. In late May, a judge refused to grant Domino’s Pizza’s motion to dismiss concerning a no-hire provision that was included in the chain’s franchise agreements. The clause prohibited franchisees from recruiting or hiring other Domino’s franchisee employees without prior written consent. The judge found that plaintiff had sufficiently pled a horizontal restraint between franchisees and did not need to decide at the motion to dismiss stage which standard should ultimately be applied. The court reasoned that more factual development would be needed to decide that issue, unpersuaded by Domino’s Pizza’s reliance on summary judgment and trial decisions that contained a more robust factual record. A recent order by a district court evaluating similar claims against Jimmy John’s highlighted the varying positions emerging, referring to a “dichotomy” between DOJ’s position and the American Antitrust Institute. Although it acknowledged that DOJ is a “titan in this arena,” the court stressed that the agency is “not the ultimate authority on the subject.”

For now, employers that are members of any no-poach agreement with a vertical component should proceed with caution. Although DOJ’s position is favorable to no-poach agreements they deem vertical in nature, questions remain as to whether these agreements warrant per se, quick look, or rule of reason analysis.[1] Courts are proceeding cautiously, and a consensus has not yet emerged. As the court in Jimmy John’s succinctly summarized: “[T]hese questions here are in their infancy, and this battle looks like one that will make its way through the courts for years to come.”

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[1] A “quick look” analysis is used “when the great likelihood of anticompetitive effects can easily be ascertained.” California Dental Assn. v. FTC, 526 U.S. 756, 770 (1999).

Toward Uncharted Waters – The CVS-Aetna Merger

On June 4 – 5, 2019, Judge Richard J. Leon of the U.S. District Court for the District of Columbia held an extraordinary and unprecedented evidentiary hearing to decide whether to enter the proposed Final Judgment in U.S. v. CVS/Aetna requiring the divestiture of Aetna’s Medicare Part D business. Judge Leon has been highly critical of DOJ’s proposed remedy and has disrupted long-established DOJ practices to resolve competitive concerns in merger cases. A decision to reject the Division’s proposed remedy would upend established law, interfere with DOJ’s ability to negotiate merger settlements, and create uncertainty in DOJ’s merger enforcement program.

Procedural History

Following an 11-month investigation, the Antitrust Division on October 10, 2018 filed a lawsuit seeking to enjoin CVS Health Corporation’s $69 billion acquisition of Aetna, Inc. The complaint alleged the transaction would substantially lessen competition for the sale of individual prescription drug plans (“individual PDPs”) in 16 regions in the U.S. Individual PDPs provide Medicare beneficiaries with insurance coverage for their prescription drugs (Medicare Part D). To address the harm alleged in the Complaint, the Division filed a proposed Final Judgment that required CVS to divest Aetna’s nationwide individual PDP business to WellCare Health Plans, Inc.

When settling an antitrust case, DOJ must comply with the Tunney Act, which establishes various procedures the parties must follow, after which the settlement can be submitted to the court to determine whether entry of the proposed Final Judgment “is in the public interest.”[1] Consistent with standard Tunney Act practice, Judge Leon entered an order permitting the parties to close their transaction and requiring CVS to hold separate Aetna’s individual PDP business until the assets are divested to WellCare. Pursuant to Judge Leon’s order, the parties closed their transaction on November 28, 2018, and two days later completed the divestiture to WellCare.

Despite having authorized the parties to close the transaction, Judge Leon became concerned the status quo would not be preserved in the event he subsequently concluded the proposed Final Judgment would not be in the public interest. Judge Leon was very critical of the proposed remedy, which he said involved “about one-tenth of one percent” of the value of the transaction. He also expressed concern that the proposed Final Judgement failed to address potential harm in the market for pharmacy benefit management (“PBM”) services. PBM providers manage pharmacy benefits for health plans and negotiate their drug prices with pharmaceutical companies and retail pharmacies. Specifically, Judge Leon wanted to preserve the option to reject the proposed Final Judgment if he found that DOJ, in failing to allege harm in the PBM market, had drafted the Complaint so narrowly as “to make a mockery of judicial power.”[2]

Judge Leon ordered the parties to explain why CVS should not be required to hold Aetna separate and insulate the management of the two companies during the pendency of the Tunney Act process. DOJ vigorously objected that the court did not have the power to consider possible harm in the PBM market because the complaint did not allege harm in the PBM market and the record before the court did not implicate the judicial mockery standard. Ultimately, CVS diffused the issue when it voluntarily agreed to stop further integration efforts and to preserve the status quo by operating Aetna’s health insurance business as a separate unit from CVS’s businesses.

The Tunney Act requires the publication of the proposed Final Judgment followed by a 60-day public comment period. DOJ received 173 comments about the proposed settlement, many criticizing the remedy. DOJ filed its response to the public comments on February 13, 2019. It concluded that the proposed Final Judgment provides an effective and appropriate remedy for the antitrust violation alleged in the Complaint and is therefore in the public interest. Thereafter, the Division filed a motion requesting that Judge Leon enter the proposed Final Judgment.

Tunney Act Hearing

In most Tunney Act proceedings, courts make their public interest determination based on the Complaint, the terms of the proposed Final Judgment, public comments, and DOJ’s response to the public comments. In rare cases, the court will consider argument from the parties and on very rare occasions will hear from other interested parties. Here, Judge Leon accepted briefs opposing the remedy filed by amici curiae the American Medical Association, AIDS Healthcare Foundation, and Consumer Action and U.S. PIRG. In an unprecedented move, Judge Leon ordered a hearing to take live testimony from witnesses presented by the amici and the parties. In connection with the ordered hearing, Judge Leon directed the parties and amici to submit lists of witnesses and a summary of their testimony and issued the following rulings concerning the conduct of the hearing:

  • From the list submitted by the amici, Judge Leon selected three witnesses: an economic expert, the President of the American Antitrust Institute and the Chief Medical Officer from the AIDS Healthcare Foundation.
  • From the CVS list, Judge Leon selected CVS’s economic expert, Aetna’s Vice President of its Medicare Part D business and CVS’s Chief Transformation Officer.
  • Judge Leon refused to hear testimony from DOJ’s economic expert and WellCare’s Executive Vice President of Clinical Operations and Business Development.
  • Judge Leon ordered that witnesses will not be subject to cross-examination and there would be no opening and closing arguments.
  • Judge Leon overruled DOJ’s objection that the proposed hearing procedures gave the amici the ability to frame the issues and denied the DOJ from meaningful participation in the proceedings.

Over the two-day hearing, Judge Leon heard testimony from the amici’s expert witnesses that WellCare is not a suitable divestiture buyer because: (i) WellCare does not have Aetna’s brand recognition, (ii) WellCare will be dependent on CVS to provide PBM services and (iii) the divestiture itself raises concentration levels in several regions. Judge Leon also heard testimony from two amici witnesses that the merger raises vertical competitive concerns. By combining CVS’s thousands of pharmacies and 92 million PBM members with Aetna’s 22 million insurance customers, the merged firm will have a greater ability and incentive to deny its PBM services to rival health plans or raise the prices for its PBM services to rival plans. After the two-day hearing, Judge Leon indicated that he would accept final briefs and hear closing arguments next month.

What’s Next

The CVS/Aetna merger entered murky waters some months ago and is now headed toward uncharted waters. Pressuring merging parties to hold the two companies separate while the Tunney Act process plays out is unnecessary and unwarranted. Nothing in the Tunney Act bars the parties from consummating their merger, and consumers may be harmed by delaying integration activities that may generate efficiencies. Nor does closing prevent DOJ from obtaining additional relief if necessary. Parties that close before the settlement receives final approval by the court bear the risk the proposed remedy is not in the public interest and therefore may have to make additional concessions to obtain court approval. The Tunney Act evidentiary hearing was also highly unusual and did not give DOJ a fair opportunity to defend its settlement. In particular, DOJ had no cross-examination rights and no opportunity to offer expert testimony to rebut the testimony from the amici’s expert. Also unusual was Judge Leon’s decision to reject testimony from WellCare, even though the amici challenged WellCare’s suitability as a divestiture buyer.

The CVS/Aetna proceeding highlights a tension in the Tunney Act. Judge Leon’s public interest determination is limited by binding D.C. Circuit precedent U.S. v. Microsoft. Under Microsoft, DOJ has considerable discretion to settle antitrust cases and the court’s review is limited to reviewing the proposed remedy in relationship to the allegations in the complaint. A Tunney Act court does not have the authority to inquire into matters outside the scope of the complaint. Judge Leon clearly bristles at playing such a limited role. At a November 29, 2018 status hearing, Judge Leon said that he would not take a “rubber stamp” approach to approving the proposed Final Judgment. Judge Leon’s May 13, 2019 order regarding the Tunney Act hearing noted that Microsoft authorized a Tunney Act court to reject a settlement that makes a “mockery of judicial power.” The court’s actions clearly suggest that DOJ’s failure to allege and remedy harm in the PBM market may satisfy the “judicial mockery” standard.

It remains to be seen if Judge Leon, based on a two-day hearing, will second-guess DOJ’s decision that the merger will not harm competition in the PBM market. Given controlling authority in the D.C. Circuit and the irregularities in the Tunney Act proceeding, Judge Leon may conclude his only option is to enter the proposed Final Judgement. If, on the other hand, he rejects the proposed Final Judgment for failing to address concerns outside the scope of the Complaint, he will likely be overruled by the D.C. Circuit.

___________________

[1] The Antitrust Procedures and Penalties Act, 15 U.S.C. §§16(b)-(h).

[2] U.S. v. Microsoft Corp., 56 F.3d 1448, 1462 (D.C. Cir. 1995).

 

Whistling in the Wind? DOJ’s Unusual Statement of Interest in FTC v. Qualcomm Case Highlights Disparity Between U.S. Antitrust Agencies on FRAND, SEPs, & Competition Law

In a highly unusual move, the U.S. Department of Justice Antitrust Division (DOJ) recently filed a statement of interest in the Federal Trade Commission (FTC)’s unfair competition case against Qualcomm. The statement asks the court to order additional briefing and hold a hearing on a remedy if it finds Qualcomm liable for anticompetitive abuses in connection with its patent licensing program. As the FTC pointed out in its short response to the DOJ, the court had already considered and addressed the question of whether liability and remedies should be separately considered, and the parties had already submitted extensive briefing regarding remedies.

The DOJ’s “untimely” statement of interest, in the words of the FTC, comes three months after a bench trial concluded in January of this year, while the parties are awaiting a decision on the merits from Judge Koh. The DOJ’s filing represents the most direct clash between the DOJ and the FTC on the issue of standard-essential patents (SEPs) subject to a commitment to license on fair, reasonable, and nondiscriminatory terms (FRAND). The two agencies have expressed divergent positions but up until recently had not directly taken any affirmative actions in the other’s cases or enforcement activities.

Though the statement of interest notes that the DOJ “takes no position . . . on the underlying merits of the FTC’s claims,” the DOJ’s views on this subject are well known. Assistant Attorney General for Antitrust Makan Delrahim has been a prominent and outspoken critic of the principal theory of the FTC’s entire case—that breach of a FRAND commitment can amount to an antitrust violation—despite the fact that legal precedent is well-settled in favor of the FTC’s position.

The Filing Represents Another Step by DOJ to Protect SEP Holders

For some time now, the DOJ has articulated a position largely hostile to the FTC’s underlying theory in its case against Qualcomm: the applicability of competition law upon a breach of a FRAND commitment. As background, SEPs are patents that have been voluntarily submitted by the owner and formally incorporated into a particular technological standard by a standard-setting organization (SSO). Because standardization can eliminate potential competitors for alternative technologies and confer significant bargaining power upon SEP holders vis-à-vis potential licensees, many SSOs require that the patent holder commit to license its SEPs on FRAND terms.

Beginning in late 2017, AAG Delrahim made a series of speeches presenting the DOJ’s new position on SEPs, FRAND commitments, and competition law. Among other issues, AAG Delrahim stated that the antitrust laws should not be used to police the FRAND commitments of SEP holders, insisting that such issues are more properly addressed through contract and other common law remedies. This new position by the DOJ was notable not only because it reversed the approach of the prior administration but also because it was largely inconsistent with numerous U.S. court decisions—including Judge Koh’s denial of Qualcomm’s motion to dismiss the FTC’s case. At a conference last week, AAG Delrahim doubled down on the DOJ’s position and stated he is looking for the “right case” to test the DOJ’s views on this issue. But if the DOJ were to press its views in court, it would find itself in a difficult and awkward position of having to argue that other cases that have ruled on these issues were wrongly decided.

In addition to the speeches, the DOJ has taken measures to implement its new approach, which up until recently, stopped short of effectively challenging the FTC. First, the DOJ opened several investigations of potential anticompetitive conduct in SSOs by companies that make devices implementing standards. Second, the DOJ withdrew its support from a 2013 joint statement issued by the DOJ and the U.S. Patent & Trademark Office on remedies for FRAND-encumbered SEPs because of the DOJ’s view, as explained by AAG Delrahim recently, that the policy statement “put a thumb on the scale” in favor of licensees. Third, the DOJ sought to submit another statement of interest in a private lawsuit filed by u-Blox alleging that InterDigital breached its FRAND commitments by demanding supra-competitive royalty rates for various wireless communications SEPs.

The DOJ’s current position fails to recognize the market distortion that can result when an SEP owner fails to comply with a voluntary commitment to limit those same patents rights—and the market power that is conferred on SEP holders in return for that commitment. It also fails to recognize that such policy actions ultimately will embolden certain SEP owners to engage in even more aggressive behavior at a critical period when innovative companies are beginning to incorporate wireless communications SEPs into entirely new industries, such as automobiles and the Internet of Things.

DOJ’s Filing Is Highly Unusual

The DOJ’s decision to insert itself into a case brought by another enforcement agency is exceedingly rare (although not entirely unprecedented). This is especially true because the FTC is representing the interest of consumers by acting pursuant to its authority under the FTC Act. The timing is also curious because the DOJ waited three months after the bench trial ended to file its statement, likely long after the court began drafting its opinion. The statement could be seen as a warning to the court that if it finds an antitrust violation it should not impose a remedy based on the evidence presented at trial.

The DOJ’s statement of interest further begs the question of why the agency thought it was necessary to bring itself into the case. To the extent that Qualcomm believes that the court should order additional briefing and a hearing on the issue of a remedy, even though the issue has seemingly already been addressed, Qualcomm is perfectly capable of presenting those views to the court on its own. In its response, the FTC made clear that it “did not participate in or request” the DOJ to weigh in on the case.

DOJ’s filing notes it is concerned about the risk that an “overly broad remedy” could “reduce competition and innovation in markets for 5G technology and downstream applications that rely on that technology.” But such a statement is remarkable. First, it suggests that the DOJ believes its sister enforcement agency is not concerned about fostering competition and innovation. Second, the statement suggests that the DOJ is willing to second-guess from the sidelines the judgment of both a court and competition agency that have been evaluating in detail the effect of Qualcomm’s business practices. Even if both of those positions are true, it is surprising to see the DOJ submit such a controversial filing in a matter in which AAG Delrahim is recused.

Ultimate Impact of Filing

The DOJ could have had multiple underlying motivations for choosing to submit this filing. Consistent with the split between the DOJ and FTC noted above, the DOJ could be signaling to the court that it disagrees with the FTC’s theory of competitive harm in an effort to influence the outcome on the merits. The DOJ could also be attempting to apply subtle pressure on the FTC to reach a settlement with Qualcomm to avoid drawing further attention to the two agencies’ divergent views on breach of a FRAND commitment. The statement could also be intended to discourage litigants from bringing antitrust cases premised on a breach of FRAND theory, demonstrating that, like in the u-Blox case, the DOJ is not reluctant to intervene.

However, regardless of the DOJ’s intention, its filing is unlikely to achieve any of those objectives. Judge Koh is an experienced judge who is well versed in issues at the intersection of antitrust and intellectual property law and does not shy away from ruling on difficult issues. Notably, when the FTC and Qualcomm jointly requested that she delay ruling on the FTC’s motion for partial summary judgment to pursue settlement negotiations, she denied the request and issued a significant decision holding that Qualcomm’s FRAND commitment means that it must offer licenses to its SEPs to competing chipset suppliers. Judge Koh may also exercise discretion to deny the DOJ’s statement, as the FTC pointed out in its response. More broadly, it is also unlikely that such a public airing of disagreement will go over well with an agency very focused on the state of competition in technology sectors. And the statement is also unlikely to deter private plaintiffs in light of the well-established and increasing body of case law holding that a breach of FRAND can violate competition law. The DOJ’s statement of interest, as unusual as it is, may ultimately amount to nothing more than whistling in the wind.

Not Subject to Per Se Analysis – Sixth Circuit on Plausibly Procompetitive Activity in Connection with a Joint Venture

Businessman hand touching JOINT VENTURE sign with businesspeople icon network on virtual screen Antitrust Analysis of Joint Ventures Antitrust Analysis of Joint Ventures – Structural Considerations

In The Medical Center at Elizabeth Place, LLC v. Atrium Health System, Case No. 17-3863 (6th Cir. Apr. 25, 2019), the Sixth Circuit held that activity in connection with a joint venture that is plausibly procompetitive is not subject to per se analysis or condemnation. In doing so, it aligned itself with the Second, Seventh, Eighth and Ninth Circuits, and against the minority approach taken by the Eleventh Circuit.

The Medical Center at Elizabeth Place (MCEP) was a physician-owned, for-profit hospital in Dayton, Ohio. It failed as a physician-owned enterprise and was sold to Kettering Health Network. MCEP alleged that it failed because of the anticompetitive efforts of Premier Health (Premier), a dominant healthcare network in the Dayton area comprising four hospitals. In an earlier opinion, 817 F.3d 934 (6th Cir. 2016), the Court held that Premier comprised multiple competing entities and, therefore, could engage in concerted action.

On remand, the plaintiffs pursued only a per se claim and eschewed a Rule of Reason claim. The trial court granted the defendants’ motion for summary judgment, finding that the defendants’ behavior had plausible procompetitive effects and so was not subject to per se analysis.

The Sixth Circuit affirmed. “[A]t the summary judgment phase,” the court held, “the right question to ask regarding per se claims is whether the plaintiff has shown that the challenged restraint is so obviously anticompetitive that it should be condemned as per se illegal. If, in spite of the plaintiff’s efforts, the record indicates that the challenged restraint is plausibly procompetitive, then summary judgment for the defendants is appropriate.” Slip. Op. at 10.

Under Texaco Inc. v. Dagher, 547 U.S. 1 (2006), there are three types of joint venture restraints: (1) those core to the venture’s efficiency-enhancing purpose (such as setting prices for venture products); (2) those ancillary to the venture’s efficiency-enhancing purpose; and (3) restraints nakedly unrelated to the purpose of the venture. Only the last of these three justifies per se treatment. See id. at 7-8; see also Medical Center at Elizabeth Place, Slip. Op. at 11.

The Sixth Circuit held that, in the case of ancillary restraints, defendants need not show that the restraints are necessary to the venture’s efficiency-enhancing purposes. Instead, there only need be a plausible procompetitive rationale for the restraint. See id. at 12-13. “We follow the majority of Circuits and hold that a joint venture’s restraint is ancillary and therefore inappropriate for per se categorization when, viewed at the time it was adopted, the restraint ‘may contribute to the success of a cooperative venture.’” Id. at 14 (cit. omit.).

The Court also rejected MCEP’s argument that the defendants had the burden of proving that a challenged restraint is procompetitive and therefore ancillary. For a per se claim, whether challenged conduct belongs in the per se category is a question of law. See id. at 15.

The Court then reviewed the two kinds of conduct challenged by MCEP. First were “panel limitations,” wherein the hospital defendants stipulated to payers that if they added MCEP to their networks, the hospital defendants would be able to renegotiate prices. The Sixth Circuit held that these restraints supported procompetitive justifications (helping to ensure patient volume and reduced customer premiums). See id. at 16-17.

Second, MCEP challenged a letter by physicians affiliated with the defendants purportedly threatening a loss of patient referrals to doctors who invested in MCEP as well as terminations of leases of MCEP-affiliated doctors and non-compete agreements. But the letter, the Court held, was not a restraint itself but merely an expression of opinion, while the lease terminations arguably prevented free-riding by the doctors and the non-competes were subject to Rule of Reason review.

MCEP also alleged a conspiracy among payers and a conspiracy among physicians not to deal with it. But the Court held that these conspiracy allegations were new and untimely and therefore not properly before the district court.

The Sixth Circuit’s decision further clarifies the limited applicability of the per se rule in the context of joint ventures, and aligns the Sixth Circuit with the majority approach of the other circuits that have considered the issue. However, the Sixth Circuit’s first decision in the case, reported at 817 F.3d 934 (6th Cir. 2016) – where the Court found that the defendant hospitals could conspire with each other despite the existence of a well-crafted joint operating agreement and based on “intent” evidence – remains somewhat opaque and counsels in favor of careful review of joint venture structure and monitoring of joint venture operations.

 

Dusting the Regulatory Framework – French Competition Authority Seeks to Liberalize Distribution of Drugs and Private Medical Biology

On April 4, 2019, just three months after the publication of the European Commission (EC) report on “Competition enforcement in the pharmaceutical sector,” the French Competition Authority (FrCA) issued its report n°19-A-08 on “Distribution of drugs and private medical biology.” While the reports do not have much in common, except maybe the shared concern of excessive prices in the pharmaceutical sector, they both illustrate the keen interest of the European competition authorities in this sector. The focus of the EC report is the market players’ conducts and how they may impede competition. The FrCA report rather focuses on the obstacles to effective competition that may derive from the current legislative and regulatory framework and may translate in a competitiveness gap to the detriment of French-based operators and in higher prices for patients. It deals inter alia with a French “exception”: the monopoly of pharmacies and pharmacists over drug distribution. The report also covers a wide range of French-centric topics from online sales of drugs to capital ownership of private biology medical laboratories and pharmacies, and drug advertisement, as well as the situation of wholesalers-distributors.

Softening the pharmacies and pharmacists’ monopoly over drug distribution

16 of 28 EU Member States have softened the pharmacies’ and/or pharmacists’ monopoly over drug distribution. Among France’s neighboring countries, only Belgium, Luxembourg and Spain have a legislation as restrictive as France, where drugs, whether prescription-only or over-the-counter (OTC), may only be sold in pharmacies by qualified pharmacists.

After noticing the positive effects on prices of the enlargement of the distribution channels for certain medical devices, the FrCA advocates for a liberalization of pharmacies’ monopoly over the sale of OTC drugs, to allow drugstores and supermarkets to sell them as well. For the sake of public health, it is suggested to preserve the pharmacists’ monopoly over their sale, meaning that OTC drugs could be sold in drugstores or supermarkets but only by qualified pharmacists on whom no sales targets may be applied, and in delineated spaces with their own cash point.

Softening the regime applicable to advertising issued by pharmacists

The current regulations provide for a strict framework for advertising issued by pharmacies, be it done in favor of the pharmacies themselves or of any product, drug or other, marketed by them.

According to the FrCA, the way those regulations are currently being construed translates into excessive restrictions and prevents pharmacists from using any form of advertising, including when it does not pertain to medicinal products and therefore does not present any risk to public health.

One of the detrimental consequences thereof is the absence of any real competitive pressure between pharmacies and significant price disparities. For instance, the FrCA has found price disparities between pharmacies ranging from 103.4% to 431% for certain drugs.

The FrCA considers that softening the framework for advertising issued by pharmacists and increasing price transparency would contribute to boost competition between them, and between pharmacists and supermarkets and drugstores commercializing the same personal care products.

One of the recommendations issued by the FrCA in that respect would be to better distinguish between advertisement for drugs and for personal care products: by, for instance, allowing pharmacists to put in place rebates and loyalty programs for the latter.

Softening the rules applicable to online drug distribution

Directive 2011/62/EU obliges EU Member States to allow online sales of OTC drugs and permits online sales of prescription drugs. Implementation of the Directive has noticeably differed between countries. For instance, the UK and the Netherlands have allowed online sales for both OTC and prescription drugs by pure-players. Germany, Portugal, Sweden and Denmark have allowed the sale of any drug (OTC or prescription), but only by websites leaning on a physical pharmacy. Finally, France, Belgium, Spain, Italy and Ireland have limited online sales to OTC drugs and impose a physical pharmacy.

Questioning the effectiveness of the legal framework in France, the report points out that online sales of drugs are not very well developed in France. Most French patients still think the practice is illegal or non-existent. As a result, online sales of OTC represent only 1% of total sales in France vs 14.3% of total sales in Germany. Besides, the French offer of online sales is very limited compared to that of other European countries.

According to the FrCA, the development of online sales is impeded by the numerous legal constraints facing France-based players. In particular, the prohibition of joint websites between pharmacies is being challenged because it prevents them from pooling their resources. Furthermore, the FrCA points out the difficulty for pharmacies to get visibility since the law prohibits advertising of online sales websites, comparison price websites and paid referencing.

Here again, the FrCA considers that the solution would be to soften the applicable legal framework to provide patients with better information on the online sale of medicines, as well as on the actors authorized to do so. This enhanced information would promote the emergence of an economic model better suited to the development of competitive national operators capable of competing effectively with foreign players.

Other issues addressed

The report also points out several improvable aspects that could help balance the market. The FrCA points out the rules of capital ownership of pharmacies and private medical biology laboratories that could be softened to allow better access to financing and, regarding private biology medical laboratories, to put an end to an asymmetry existing as a result of a softening in the rules of capital ownership followed by a step backward, which has created an unjustified difference between laboratories that could benefit from the softening and the ones that were created after the step backward. Finally, the FrCA advocates for a revision of the method of remuneration of wholesalers-distributors, allowing for a fairer compensation of the heavy public service mission weighing on them.

Conclusion

This report is another illustration of what could start to become an interesting trend at the FrCA: using its power to deliver opinion to invite the legislator to tackle the inefficiencies and barriers to competition created by old and sometimes overly rigid rules in regulated sectors. In the same vein, one may mention its report of February 21, 2019, n° 19-A-04, on the broadcasting sector, where the FrCA advocates for a softened regulation of the sector to consider the development of new technologies and market entry of new players.

While this trend is welcome for France-based players and also for consumers in general, it remains to be seen how these recommendations will be used (or not) by the legislator.

 

China’s Conditional Approval of Bayer’s Acquisition of Monsanto: Lessons for Future Merger Cases in China

On March 13, 2018, China’s Ministry of Commerce (“MOFCOM”)[1] announced its Conditional Approval following antitrust review of a concentration of undertakings relating to Bayer’s proposed merger with Monsanto (“Merger”) (Bayer and Monsanto are hereinafter collectively referred to as the “Parties”). This matter, plus three other mergers approved with restrictive conditions by MOFCOM or SAMR in 2018, suggests some trends in China’s approach to antitrust merger review, as discussed below.[2]

In the Bayer/Monsanto matter, the Parties filed a declaration on concentration of undertakings with MOFCOM on December 5, 2016. Afterwards, the Parties withdrew and refiled the declaration twice, and MOFCOM’s review period for each refiled declaration was extended once, with the last one extended to March 15, 2018, which indicates the complexity of the Merger and the antitrust review.

During the review process, MOFCOM raised the concern that the Merger would or might have the effect of eliminating and restricting competition in the following markets: (1) China’s non-selective herbicide market; (2) China’s vegetable seed market (long-day onion seeds, carrot seeds and large-fruit tomato seeds, etc.); (3) field crop traits (corn, soybean, cotton, and oilseed rape); and (4) digital agricultural markets.

According to Article 27 of the Anti-Monopoly Law, the Ministry of Commerce conducted an in-depth analysis of the impact of the Merger on market competition from the following aspects, among others: (i) the market concentration of the relevant market; (ii) the market share and the control of the market by the participating operators in the relevant market; (iii) the impact on market entry and technological progress; and (iv) the impact on consumers and other relevant operators. MOFCOM solicited opinions from relevant government departments, industry associations, downstream customers and industry experts, and held multiple symposiums to understand relevant market definitions, market participants, market structures, industry characteristics, etc. Based on its analysis, MOFCOM believed that the Merger would or might have the effect of eliminating or restricting competition in the four markets, as mentioned above.

MOFCOM then timely informed the Parties of its review opinions and conducted multiple rounds of negotiations with the Parties on how to reduce the adverse impact of the Merger on competition. For the restrictive conditions submitted by the Parties, MOFCOM, in accordance with the “Provisions of MOFCOM on Imposing Additional Restrictive Conditions on the Concentration of Business Operators (for Trial Implementation),” evaluated mainly the following aspects, among others: (i) the scope and effectiveness of divested business; (ii) the divested business’ continuity, competitiveness and marketability; and (iii) the effectiveness of conditions requiring actions to be taken. On March 13, 2018, after evaluation, MOFCOM decided to approve the Merger with additional restrictive conditions, requiring Bayer, Monsanto and the post-merger entity to fulfil the following obligations:

  1. Globally divesting (i) Bayer’s vegetable seed business, (ii) Bayer’s non-selective herbicide business (glyphosate business), and (iii) Bayer’s corn, soybean, cotton, and oilseed rape traits businesses. The above divestitures include divesting related facilities, personnel, intellectual properties (including patents, know-how and trademarks) and other tangible and intangible assets.
  2. Allowing all Chinese agricultural software application developers to connect their digital agricultural software applications to the digital agriculture platform(s) of Bayer, Monsanto and the post-merger entity in China, and allowing all Chinese users to register with and use the digital agricultural products or applications from Bayer, Monsanto and the post-merger entity, within five years from the date when Bayer’s, Monsanto’s and the post-merger entity’s commercialized digital agricultural products enter the Chinese market, and based on fair, reasonable and non-discriminatory terms.

This case, as well as the other three mergers approved with restrictive conditions by MOFCOM or SAMR in 2018, suggests the following trends in China’s antitrust review of mergers:

  •  Economic analysis and market research tools are more frequently being introduced for case analysis. In the Bayer/Monsanto Merger, MOFCOM frequently used the Herfindahl-Hirschman Index (“HHI”) to analyze market concentration issues, and MOFCOM also held hearings/seminars to discuss issues related to market definition, market structure and industry characteristics with industry experts.
  • Potential effects of excluding or limiting competition without proved market shares may also be considered in the antitrust review. In the Bayer/Monsanto Merger, as to the large fruit tomato seeds market, Monsanto’s market share was 10-20%, which was believed to be much larger than that of other competitors. Considering that Bayer was an important competitor in the market, MOFCOM believed that Bayer’s potential in the Chinese market had not yet been fully reflected in its own market share, and that the Merger might render the market less competitive. Thus, in addition to market shares, the Parties’ market power or potential for expansion will also be considered when determining whether or not a merger might exclude or limit the competition in the market.
  • The impact on technological progress will be assessed and the theory of damaging innovation is likely to be adopted. In the Bayer/Monsanto Merger, MOFCOM adopted a “damaging innovation” theory by positing that a merging party’s innovative level and research and development (R&D) ability should be considered in assessing its market position. After the merger, because there are fewer R&D competitors, the merging parties might have less incentive to innovate and they might reduce R&D investment and delay the release of new products to the market, consequently causing an adverse impact on innovation in the whole market. It seems likely that Chinese antitrust officials will continue to consider the technological factor and will apply the damaging innovation theory when necessary for reviewing complicated transactions.
  • Structural conditions and conditions requiring certain actions to be taken may be combined as remedies. Finally, in the Bayer/Monsanto Merger, MOFCOM imposed both structural conditions (requiring global divestiture of certain of Bayer’s businesses) as well as conditions requiring certain actions to be taken (requiring that the Parties make their platforms and digital agricultural products available to Chinese users). Similar combined remedies were imposed in two of the three other approved mergers in 2018. Again, it seems likely this trend will continue.

_____________

[1] In April 2018, the anti-monopoly law enforcement agencies under the three ministries, i.e. the Ministry of Commerce, the National Development and Reform Commission and the State Administration for Industry and Commerce, were incorporated into the newly-formed State Administration for Market Regulation (“SAMR”) based on the State Administration for Industry and Commerce.

[2] See Announcement No. 31 [2018] of the Ministry of Commerce – Announcement on Anti-monopoly Review Decision concerning the Conditional Approval of Concentration of Undertakings in the Case of Acquisition of Equity Interests of Monsanto Company by Bayer Aktiengesellschaft Kwa Investment Co. [Effective], available at http://fldj.mofcom.gov.cn/article/ztxx/201803/20180302719123.shtml.

 

EU State Aid Tax Ruling Cases: Not Yet the End of It?

More than a couple of years ago, a lot of fuss was made around the first string of State Aid tax rulings cases of the European Commission (Starbucks, Fiat, Apple, the Belgian scheme relating to the excess profit of multinational companies). Everyone has indeed heard about the massive amounts of State Aid, sometimes wrongly qualified by journalists as “fines”, that the European Commission ordered various EU Member States to recover from companies having benefitted of reportedly special and preferential tax treatment (e.g., up to €13 billion from Apple in the Irish tax ruling case).

At the time, some pretended that the approach taken by the European Commission was totally unheard of and that it was just another way for the European Commission to harass large U.S. companies.

They were not quite right.

The approach taken by the European Commission undoubtedly hinges on old precedents and on the European Commission guidance on the application of the State Aid rules to measures relating to direct business taxation (1998). What seems true however is that the European Commission, experiencing political pressure from the European Parliament in the aftermath of LuxLeaks, may have sometimes acted in haste at the cost of a lack of robustness of the underlying legal reasoning. The first setback suffered by the European Commission before the EU judge (annulment of the decision against the Belgian scheme relating to the excess profit of multinational companies) or the early closure by the European Commission (without any in-depth investigation) of the case against the Luxembourg tax ruling in favor of McDonald’s, tend to illustrate this point. But these findings do not equally apply to all tax ruling cases (about ten cases). It goes without saying that not all the tax rulings cases will come to a happy ending for beneficiaries. The case against Gibraltar which decided not to appeal the European Commission’s decision ordering recovery of €100 million of unpaid taxes from multinational companies is a good counter-example.

To see the bright side, the refined analytical grid which will soon emerge from those cases will at least help the EU Member States and (actual or potential) beneficiaries of tax rulings within the EU to better assess their own risks.

Why is it important to keep an eye on these developments?

  • There may still be a few more State Aid cases to come regarding tax rulings. Since the beginning of 2019, no less than two new investigations have been launched by the European Commission (Nike, Huhtamäki). They signal that some rulings are still under review;
  • The financial stakes may be high;
  • The time limitation period for the European Commission to order recovery of the aid is 10 years; and
  • Should the aid be deemed unlawful and incompatible, State Aid recipients bear in fine the risk of recovery.

That said, it remains difficult to predict what the next cases will be. Part of the answer probably lies with the statements of Commission’s officials who suggested that the European Commission would prioritize what it would perceive as the most caricatural cases.

It would however be surprising if this was to remain at the heart of the European Commission’s State Aid priorities once it has exhausted its current stock of rulings (those made known in the context of LuxLeaks, Panama Papers or Paradise Papers or those requested from the EU Member States in the years 2013-2014). With the State Aid cases that prompted changes of practices from EU Member States and the new legislative safeguards (e.g., EU Directive 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market to be transposed by EU Member States this year), one may indeed reasonably think that the State Aid tax rulings subject will gradually lose its topicality…at least until the next tax scandal.

Hell or High Water for Nidec

The phrase “come hell or high water” is said to have originated in the late 1800s in reference to the conditions cattle herders encountered when they trekked from Texas to the Midwest across large prairies in the summer heat and through deep rivers. In the merger context, a hell or high water (HOHW) clause requires a buyer to take all action necessary, including divestitures, to secure approval from competition authorities. On March 8, 2019 Whirlpool Corp. sued Nidec Corp. in the Southern District of New York alleging that Nidec breached its obligations under their Share Purchase Agreement (SPA) to take all actions required to secure antitrust approvals. The case highlights the importance of antitrust risk sharing provisions in merger agreements and how courts interpret HOHW provisions.

The Whirlpool Complaint

On April 24, 2018 Nidec and Whirlpool entered into the SPA for Nidec’s $1.1 billion purchase of Whirlpool’s Embraco compressor business unit. Whirlpool manufactures home appliances and related products. Whirlpool’s Embraco business unit manufactures refrigeration compressors for kitchen refrigerators and freezers and for light commercial uses such as beverage coolers. Nidec manufactures electric motors and related products. Nidec’s Secop business unit is an Embraco competitor that also manufactures refrigeration compressors.

Given the competitive overlap in refrigeration compressors, the parties anticipated the transaction would encounter significant antitrust issues. The SPA contained several provisions that allocated the antitrust risk to Nidec:

  • Conditions to Closing: Nidec agreed to obtain approvals from competition authorities, including approval from the European Commission (EC).
  • HOHW Provision: Nidec agreed to “take any and all actions and do all things necessary, proper or advisable” to obtain all competition approvals. If any competition authority raised objections, Nidec agreed “to hold separate or to divest, license or otherwise dispose of any of the businesses or properties or assets of [Nidec], and of its Affiliates, or [Embraco].”
  • Closing Date: Nidec agreed to secure all antitrust approvals in time for closing on April 24, 2019.

The EC can approve a transaction during a Phase I investigative period if the parties offer remedies sufficient to address any competitive concern. Whirlpool alleges that Nidec prolonged and hindered the EC’s Phase I review of the transaction. Specifically, Whirlpool alleges that Nidec:

  • Failed to make timely submissions to the EC;
  • Wasted valuable time making futile arguments that no remedy should be required; and
  • Submitted a series of five remedies that failed to address the EC’s competitive concerns.

According to Whirlpool, the obvious remedy was to divest all of Secop, a clear-cut remedy that would have addressed all of the EC’s concerns. Nidec, however, refused to offer this remedy, and on November 28, 2018 the EC opened an in-depth, or Phase II, investigation of the transaction. The EC’s press release announcing the in-depth investigation noted that it tested various commitments submitted by Nidec and found that they were insufficient to address the EC’s competitive concerns.

Although Nidec ultimately agreed to divest all of Secop, it continued to prolong and hinder remedy discussions during the Phase II investigation. For example, Nidec (1) delayed responding to the EC’s request for an upfront buyer, (2) failed to effectively market Secop and (3) failed to offer attractive terms to potential buyers.

As of March 8, 2019, the date Whirlpool filed its complaint, Nidec had not reached a deal with a buyer acceptable to the EC. With the April 24, 2019 closing date fast approaching, Whirlpool seeks an order requiring Nidec to meet its HOHW obligations and immediately divest Secop at no minimum price and at whatever terms required to effect an immediate sale. In the alternative, if Nidec fails to sell Secop, Whirlpool seeks the appointment of a trustee fully empowered to immediately sell Secop.

Takeaways

HOHW provisions are not commonly used in merger agreements because they signal to the competition agencies that the parties believe the transaction raises competitive concerns and can provide the agencies significant leverage to extract a remedy. Here, Whirlpool clearly anticipated significant antitrust problems and successfully shifted all risk to Nidec by obtaining a pure HOHW provision that placed no cap on the assets that could be subject to divestiture. It appears from the complaint that rather than honor its HOHW commitment, Nidec took steps to avoid making all necessary divestitures for EC clearance of the transaction.

Whirlpool argues for a strict interpretation of the HOHW provision. Whirlpool would require a buyer to promptly propose a divestiture remedy that no reasonable competition agency could reject. Nidec will likely argue for a more flexible interpretation. It is reasonable to argue no remedy is necessary before offering remedies, and it is reasonable to offer alternative divestiture packages to test a competition agency’s bottom line. There is very little case law on a party’s obligations under a HOHW provision. If Whirlpool and Nidec are unable to settle this dispute before the April 24, 2019 closing date, we may get greater clarity on what constitutes a breach of HOHW provision.

 

More Affordable and Innovative Medicines and Treatments in Europe – Has the Competition Enforcement Met the 2009 Objective?

A decade ago, the European Commission conducted a thorough sectoral inquiry into the European pharmaceutical sector that identified antitrust shortcomings impeding access to more affordable and innovative medicines and treatments. Concluding this inquiry by setting priority actions for the years to come, former Competition Commissioner Kroes called for “… more competition and less red tape …” (sic).

Since this statement, there has been intense enforcement activity in the sector not only by the European Commission itself, but also by the European Union Member States’ antitrust authorities.

In its report on “Competition enforcement in the pharmaceutical sector,”  issued on January 28, 2019, the European Commission takes stock of their actions in this space.

The past enforcement record (2009-2017): intense activity, hard stance towards pharmaceutical companies with the use of novel or less known theories of harm

Between 2009 and 2017, no less than 29 infringement decisions were issued by European antitrust authorities, leading to fines totaling over €1 billion, while the European Commission asked for structural remedies for 25% of the reportable mergers in the sector.

Antitrust enforcement

In total, European antitrust authorities investigated over a hundred cases during the 2009-2017 period. Their investigations related to a wide range of medicines and many of the actors involved in the pharmaceutical sector: manufacturers, wholesalers and retail distributors.

Applying Article 101 of the Treaty on the Functioning of the European Union (TFEU) (or its national equivalent), which prohibits anticompetitive agreements and cartels, European antitrust authorities condemned, for the first time, certain pay-for-delay agreements, whereby a generic company agrees to restrict or delay its independent entry onto the market in exchange for benefits transferred from the originator. They also condemned practices of collusion in tenders, price fixing, conduct aimed at excluding competitors or limiting their ability to compete, and other types of coordination between competitors.

Besides, European antitrust authorities found that the misuse of the regulatory framework, whereby a dominant company misleads public authorities and misuses the regulatory procedures, can infringe Article 102 TFEU (or its national equivalent). Similarly, disparagement and other practices curbing demand for generics were found to infringe Article 102 TFEU. Reviving the neglected notion of exploitative abuse, European antitrust authorities found that under certain circumstances, a dominant pharmaceutical firm may infringe Article 102 TFEU if it imposes unfair terms and conditions or excessive pricing. In these cases, the reward for innovation seemed to have weighed little in the balance against the alleged harm caused to patients.

Merger control

19 of the 80 mergers reviewed by the Commission over the 2009-2017 period were subject to structural remedies, namely divestitures, offered by the merging firms. Antitrust concerns in those cases related to the risks of (i) price increases for some medicines in one or several Member States, (ii) depriving patients and national healthcare systems of some medicinal products, and (iii) diminishing innovation in relation to certain treatments developed at the EU or even global level.

All in all, the Commission takes a positive view: it considers that active competition enforcement throughout the European Union has fostered innovation, choice and affordability by intervening where companies, unilaterally or jointly, relax competitive pressures that force them to innovate further or prevent others from innovating or illegitimately exploiting their market power.

What’s next?

After this positive assessment, the question that finally arises is whether pharmaceutical companies remain in the spotlight in Europe and should expect the same level of attention from the European antitrust authorities.

The response is, fortunately or unfortunately (depending on the standpoint), yes, definitely.

The now numerous precedents and case law have undoubtedly helped the sector to put some order into the practices implemented in the past. However, the critical challenges facing pharmaceutical companies for years (succession of blockbusters, very high cost and remuneration of innovation, very lengthy development process, etc.) weaken them and may still lead them to adopt either defensive or aggressive strategies at risk from an antitrust perspective. The European Commission remains fully aware of such risk and ultimately recommends that: “Authorities … remain vigilant and pro-active in investigating potentially anti-competitive situations, including where new practices used by companies or new trends in the industry are concerned, such as the growing relevance of biosimilars.”

So, it is most likely not the end of the story …

2019 Antitrust Writing Awards Nominees

Two articles authored (or co-authored) by Orrick attorneys have been nominated for a 2019 Antitrust Writing Award from Concurrences, published by The Institute of Competition Law. Concurrences picks its Antitrust Writing Award winners in part by popular vote. You can view the articles and cast your vote(s) here:

Voting closes on March 26, 2019.

EU: Parent Companies Are Liable for Cartel Damages Caused By Their Liquidated Subsidiaries

In a landmark judgment (Case C‑724/17, Vantaa vs. Skanska Industrial Solutions and others), the European Court of Justice (ECJ) decided on March 14, 2019 that companies cannot use corporate restructuring to escape their liability for cartel damages.

Background

The Skanska case concerned a cartel in the asphalt market in Finland. Seven companies were ultimately fined for their participation in the cartel. After the cartel became public, the municipality of Vantaa, which had bought asphalt during the cartel period, requested compensation from the cartelists. However, several companies had already been dissolved in “voluntary liquidation procedures.” Their sole shareholders (among them Skanska) had then acquired the dissolved companies’ assets and continued their economic activity.

The liquidation of the companies involved in the cartel did not prevent the Finnish authorities from imposing fines on their parent companies. They applied the “principle of economic continuity,” which is well established in the law on fines for EU competition law infringements. However, Skanska disputed that this principle should also apply in civil damages matters. It argued that it could not be held liable because it was not personally involved in the cartel.

The Decision of the European Court of Justice

The ECJ did not follow the arguments of Skanska and the other defendants and found that the defendants could be held liable for the harm caused by their former subsidiaries.

According to the ECJ, the EU prohibition of cartels will be effective, punitive and deterrent only if the associated right to seek private damages is also effective. The identification of the liable entity for a damage claim is governed by EU law and must be based on the same interpretation of the “concept of undertaking” as for the imposition of fines. This means, in particular, that companies cannot circumvent the right of victims to claim damages by dissolving the legal entity which participated in the cartel.

Practical Implications

The Skanska judgment is the latest of a series of judgments in the EU that have strengthened the rights of claimants in antitrust damages actions. It has closed the door for defendants to use corporate restructurings to escape their responsibilities. While Skanska concerns a very specific situation of legal succession, the ECJ’s reasoning implies that the entire case law on the “concept of undertaking” may be applied in private damages cases. As a consequence, corporate parents may be held liable for infringements of group companies to a far greater extent than previously thought.

The Skanska judgment will also have implications for M&A transactions. Since the “concept of undertaking” attaches liability to assets rather than to a particular legal entity, the buyer of a business in an asset deal needs to consider the possibility of being held financially accountable for antitrust infringements of the seller. This aspect should be part of any due diligence.

CMA Orders Parties to Unwind Integration During Ongoing Investigation

For  the first time, the UK Competition and Markets Authority (CMA) has flexed its regulatory muscles by ordering the unwinding – during the course of its ongoing investigation – of a completed acquisition. In a demonstration of its willingness to use all of the tools at its disposal – regardless of deal size or complexity – the CMA ordered Tobii AB (Tobii) to reverse any integration that had taken place as a result of its completed acquisition of Smartbox Assistive Technology Limited and Sensory International Ltd (Smartbox).

 

Background

Tobii announced its acquisition of Smartbox for £11 million in cash through a debt-financed deal in August 2018. Both are relatively small tech companies that provide specialist “augmentative and assistive communication” (AAC) for those with speech disabilities through hardware and software solutions, including eye-gaze cameras.

Following completion of the transaction, Tobii took various steps to integrate the Smartbox business, including entering into an agreement (Reseller Agreement) whereby Smartbox would act as reseller of Tobii products in the UK and Ireland, the discontinuation of certain Smartbox R&D projects, and the withdrawal of certain Smartbox products from the market.

CMA Investigation

In September 2018, the CMA opened an investigation into the completed transaction and subsequently found that it would lead to less choice, higher prices and reduced innovation for customers. The CMA gave the parties one week to submit undertakings to address these concerns, or the CMA would proceed to an in-depth, Phase 2 investigation.

Despite the parties offering various undertakings designed to alleviate the CMA’s concerns, these were not deemed sufficient and, on February 8, 2019, the CMA referred the transaction for Phase 2 investigation, simultaneously imposing an interim order preventing preemptive action.

Unwinding Order

Following further investigation during the Phase 2 process, the CMA issued – for the first time – an unwinding order. The order requires the parties to reverse integration and restore the parties to the positions in which they would have been had the integration not taken place. The parties are required to fulfil any open orders pursuant to the Reseller Agreement, but terminate it once these are fulfilled. Moreover, the unwinding order requires Smartbox to supply certain products which had been discontinued. Smartbox is also required to reinstate all R&D projects, including investment and staff allocations, which were discontinued due to the acquisition.

In imposing the unwinding order, the CMA concluded that the integration actions taken by the parties might prejudice the Phase 2 reference or impede the taking of any action by the CMA to rectify competitive harm caused by the transaction.

The CMA is scheduled to make its final decision on the transaction by July 25, 2019.

Practical Implications

The imposition of an order to unwind integration in a small tech deal could be seen as the CMA wielding a sledgehammer to crack a nut, but the Tobii/Smartbox case reflects several of the CMA’s priorities for 2019, including an increased focus on tech deals and the protection of vulnerable consumers.

The willingness of the CMA to use the full range of merger control tools at its disposal impacts not only tech deals, but deals in all industry sectors, regardless of size and complexity. Parties in completed transactions, which might affect competition in the UK, but which are not notified to the CMA, should consider carefully what steps to take in terms of integration, and whether and how those steps could be reversed if required to do so by a CMA unwinding order.

The CMA’s approach in this case also highlights the perils of not notifying transactions prior to completion. While the UK merger control regime is voluntary in theory, the consequences of not notifying are such that, in practice, the regime requires parties to carry out a careful pre-transaction assessment of the impact on competition in the UK and the risk of the CMA’s launching an investigation, instead of simply concluding that filing is not required because the UK regime is voluntary.

For more information, contact Douglas Lahnborg ([email protected]) or Matthew Rose ([email protected]).

 

New EU Rules on Foreign Investments: All You Need to Know About the New Screening Mechanism

The Council of the European Union (EU) has adopted a new regulation “establishing a framework for the screening of foreign direct investments into the Union” (the Regulation). This is the first time the EU is equipping itself with a comprehensive framework to monitor investments into EU businesses by investors from outside the EU.

The new rules create a cooperation mechanism where EU member states and the European Commission are able to exchange information and raise concerns. The Commission will have the possibility to issue opinions in cases concerning several member states, or where an investment could affect a project or program of interest to the whole EU. However, EU member states remain in charge of reviewing, and potentially blocking, foreign investments on grounds of security or public order. The decision to set up and maintain national screening mechanisms also continues to be in the hands of individual member states.

In the following, we give an overview of the main features of the Regulation.

The New Regulation

Until recently, there were no measures at the level of the EU on the review and control of foreign direct investments. At the national level, such measures have existed in several member states – and amid growing concerns about the impact that certain foreign investments may have on national interests, some member states have made their review procedures significantly more stringent in recent years. However, the decentralized and fragmented nature of the national review procedures raised questions about their effectiveness in addressing adequately the potential (cross-border) impact of foreign investments in sensitive sectors.

To respond to such concerns, the European Commission proposed the Regulation in 2017.

The objective of the Regulation is not to harmonize the formal foreign investment mechanisms used in EU member states, or to replace them with a single EU mechanism. Rather, it provides a mechanism for EU-wide cooperation and information sharing to allow member states to make informed decisions taking into account all relevant risks and protect pan-European interests. The decision on whether to set up a review mechanism or to review a particular foreign investment remains the sole responsibility of the member states.

The EU Council adopted the Commission’s proposal on March 5, 2019. The Regulation will enter into effect after a transitional period of 18 months following its publication in the Official Journal, expected to take place on March 21, 2019.

Under the Regulation, the competent authorities of the EU member states remain in charge of screening foreign direct investments under the applicable national laws. The role of the European Commission is to facilitate coordination and to advise member states where it considers that an investment would likely affect security or public order in one or more member states.

Transactions Subject to Review

The Regulation does not put in place a review requirement for foreign investments; rather, it sets up a procedural framework for screening mechanisms created by the EU member states. The rules of the Regulation apply to any national “procedure allowing to assess, investigate, authorize, condition, prohibit or unwind foreign direct investments.”

The definition of “foreign direct investments” is broad and does not require an investment above a defined threshold of shareholder rights or the acquisition of control in the target company. Any investment “aiming to establish or to maintain lasting and direct links” with a business in “in order to carry on an economic activity” in an EU member state is sufficient. The investment must be made by a “foreign investor,” defined as “a natural person of a third country or an undertaking of a third country.” Third countries are countries outside the EU. Therefore, the Regulation does not apply to the screening of cross-border investments inside the EU.

 

Procedure

The aim of the Regulation is to enhance cooperation and increase transparency between EU member states and the European Commission. To this end, it creates a “cooperation mechanism” that requires member states to inform each other and the Commission of incoming foreign direct investments affecting security and public order (→ EU Cooperation Mechanism for the Screening of Foreign Direct Investments):

  • Where a member state screens a foreign direct investment, it is obliged to notify the other member states and the Commission by providing, “as soon as possible,” certain information on the investment (→ Information Requirements). The other member states can then comment and the Commission can issue a (nonbinding) opinion within certain time limits, normally within 35 calendar days following the notification (this period is extended if other member states or the Commission request additional information).
  • Where a foreign direct investment in a member state is not undergoing screening and other member states or the Commission considers that the investment is likely to affect security or public order, the latter may request from the former certain information on the investment (→ Information Requirements). The other member states and the Commission may then provide comments or a (nonbinding) opinion, respectively, to the member state receiving the foreign direct investment. The time limit for comments and opinions is 35 calendar days following the receipt of information on the investment, although extensions are possible.

Although the final screening decision is the sole responsibility of the member state receiving the foreign investment, it is required to give “due consideration” to the comments of the other member states and the opinion of the Commission. Moreover, in cases where the Commission believes that the foreign direct investment may affect projects or programs of “Union interest,” the member state receiving the investment is required to take “utmost account” of the Commission’s opinion and provide an explanation if the opinion is not followed. Project and programs of “Union interest” are defined in the Annex of the Regulation. They currently include:

  • European GNSS programs (Galileo & EGNOS);
  • Copernicus;
  • Horizon 2020;
  • Trans-European Networks for Transport (TEN-T);
  • Trans-European Networks for Energy (TEN-E);
  • Trans-European Networks for Telecommunications;
  • European Defence Industrial Development Programme; and
  • Permanent structured cooperation (PESCO).

In addition to creating the cooperation mechanism, the Regulation also imposes certain minimum standards for the national screening mechanisms of EU member states. These include:

  • National rules and procedures must be transparent and not discriminate between third countries.
  • Member states must set out the circumstances triggering a screening, the grounds for screening and the applicable detailed procedural rules.
  • Member States must apply timeframes that allow them to take into account the comments of other member states and the opinions of the Commission under the coordination mechanism.
  • Confidential information must be protected.
  • Foreign investors and the undertakings concerned must have the possibility to seek recourse against screening decisions of the national authorities.
  • National screening mechanism must include measures necessary to identify and prevent circumvention.

Substantive Assessment

The Regulation does not attempt to harmonize national rules on foreign investments in the EU member states. However, it does provide a list of factors that the member states and the European Commission may take into consideration when conducting their assessment. This includes potential effects on the following:

  • critical infrastructure (incl. energy, transport, water, health, communications, media, data processing, finance);
  • critical technologies and dual use items (incl. artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum, nuclear, nano- or biotechnologies);
  • supply of critical inputs (incl. energy, raw materials, food);
  • access to sensitive information (incl. personal data); or
  • freedom and pluralism of the media.

 

M&A HSR Premerger Notification Thresholds Increase in 2019

Takeaways

  • The new minimum HSR threshold is $90 million and applies to transactions closing on or after April 3, 2019.
  • The current threshold of $84.4 million is in effect for all transactions that will close through April 2, 2019.
  • Failure to file may result in a fine of up to $42,530 per day of non-compliance.
  • The HSR Act casts a wide net, catching mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

The Federal Trade Commission has announced new HSR thresholds for 2019. The thresholds are adjusted annually, and were delayed this year by the government shutdown. Transactions closing on or after April 3, 2019 that are valued in excess of $90 million potentially require an HSR premerger notification filing to the U.S. antitrust agencies. The HSR Act and Rules require that parties to certain transactions submit an HSR filing and wait up to 30 days (or more, if additional information is formally requested) before closing, which gives the government time to review the transaction for potential antitrust concerns. The HSR Act applies to a wide variety of transactions, including those outside the usual M&A context. Potentially reportable transactions include mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

Determining reportability: Does the transaction meet the Size of Transaction test?

The potential need for an HSR filing requires determining whether the acquiring person will hold an aggregate amount of voting securities, non-corporate interests, and/or assets valued in excess of the HSR “Size of Transaction” threshold that is in place at the time of closing. Calculating the Size of Transaction may require aggregating voting securities, non-corporate interests, and assets previously acquired, with what will be acquired in the contemplated transaction. It may also include more than the purchase price, such as earnouts and liabilities. Talk to your HSR counsel to determine what must be included in determining your Size of Transaction.

If the transaction will close before April 3, 2019, the $84.4 million threshold still applies; closings as of April 3, 2019 will be subject to the new $90 million threshold.

Determining reportability: Do the parties to the transaction have to meet the Size of Person test?

Transactions that satisfy the Size of Transaction threshold may also have to satisfy the “Size of Person” thresholds to be HSR-reportable. These new thresholds are also effective for all closings on or after April 3, 2019. Talk to your HSR counsel to determine which entity’s sales and assets must be evaluated.

Filing Fee

For all HSR filings, one filing fee is required per transaction. The amount of the filing fee is based on the Size of Transaction.

Failure to File Penalty

Failing to submit an HSR filing can carry a significant financial penalty for each day of non-compliance.

Always consult with HSR counsel to determine if your transaction is HSR-reportable. Even if the Size of Transaction and Size of Person tests are met, the transaction may be exempt from the filing requirements.

Agree to Disagree: Competition Authorities Differ on Approach to Digital Platforms

Tech giants have captured the attention of competition agencies around the world. As we have previously shared, the FTC is in the midst of a series of hearings on Competition and Consumer Protection in the 21st Century, including sessions on Big Data, Privacy, and Competition and the Antitrust Framework for Evaluating Acquisitions of Potential or Nascent Competitors in Digital Marketplaces. Multiple European regulators (the EU, Germany and now Austria) recently launched investigations into Amazon. Technology platforms are a priority for many other enforcers as well, from China to Australia to the UK.

With different competition authorities weighing in on how to assess tech competition, there is the potential for divergence in intensity of enforcement as well as whether existing competition doctrine suffices. Disparities are borne out by recent statements emanating from U.S., Australian, and UK competition agencies and officials.

Fresh remarks from the U.S. DOJ Antitrust Division indicate the agency does not support a regulatory approach to platforms and the digital economy. In a speech last week, agency head Makan Delrahim addressed Antitrust Enforcement in the Zero-Price Economy, noting that while zero-price strategies have “exploded” with the rise of digital platforms, “the strategy of selling a product or service at zero price is not new, nor is it unique to the digital economy.” Mr. Delrahim acknowledged the divergent views of how antitrust enforcement should treat such products and services, which range from exemption from antitrust scrutiny entirely to the creation of new, specially crafted rules and standards. Rejecting both of these “extreme views” as “misplaced,” he emphasized the ability of current antitrust doctrine – including the consumer welfare standard – to tackle the issue, stating: “[W]e do not need a wholesale revision of the antitrust laws to address competitive concerns in these contexts. . . . [O]ur antitrust laws and principles are flexible enough to adapt to the challenges of the digital economy.” Mr. Delrahim called for “careful case-by-case analysis” in enforcement. He touted the innovation and benefits that zero-price strategies have brought to consumers, crediting the country’s “pro-market economic and legal structures” and cautioning against “distortions of our antitrust standards” to address issues like privacy and data protection if they do not impede the functioning of the free market.

His speech echoes a view Mr. Delrahim and others at the Antitrust Division have expressed previously regarding the need (or lack thereof) for new rules to address the antitrust implications of “big data.” In an October 2018 speech regarding startups, innovation, and antitrust policy, Mr. Delrahim remarked that “accumulation of data drives innovation and benefits consumers” in many ways (including by enabling zero-price offerings), and that forced sharing risks undermining innovation by reducing incentives for both incumbents and new entrants. Invoking Trinko,[1] he stated that “free and competitive markets” – not antitrust agencies or courts – are best equipped to determine “how much data should be shared, with whom, and at what price.” Deputy Assistant Attorney General Bernard Nigro, Jr. has taken a similar position, stating that “forced sharing of critical assets reduces the incentive to invest in innovation” and that “where benefits to sharing exist, they can be best captured by the parties negotiating in a free and competitive market, not by government regulation.”

By contrast, other jurisdictions and industry observers considering the competitive implications of digital platforms have questioned the status quo. In their view, control of valuable data provides a competitive advantage and raises entry barriers that may entrench a platform’s dominant position and lead to competitive or consumer harm. At a higher level, France and Germany just announced an effort to overhaul competition rules to enable European companies to better develop technologies that compete on the global stage.

For example, last week the Australian Productivity Commission and the New Zealand Productivity Commission released a joint report that reviews how most effectively to address the challenges and harness the opportunities the digital economy creates (particularly for small- to medium-sized enterprises). In a section titled “Existing competition regulation may not be adequate for digital markets,” the report addressed the challenges of applying existing laws to the digital economy, including (among others) that zero-price goods and services complicate the analysis of market definition and market power, and that data “is an increasingly important business input and may be a source of market power” but is not adequately captured in traditional competition policy. Although the report acknowledged that in some cases technological developments might obviate the need for regulation (and in others the mere threat of regulation may be enough), it posited that new regulation might be necessary to maintain competitive markets: “[I]f ‘winner-take-most’ markets do end up prevailing, competition regulators may need to consider extending tools such as essential service access regimes to digital services.” An essential service (or “essential facilities”) regime would treat a digital platform’s data as an input essential to competition and require the platform to provide its competitors with reasonable access to it. In contrast to the Productivity Commissions’ suggestion, U.S. competition enforcers to date have been loath to treat digital platforms as essential facilities.

The Productivity Commissions’ report comes on the heels of the Australian Competition and Consumer Commission’s (ACCC) Digital Platforms Inquiry preliminary findings released in December. The ACCC expressed similar concerns about the rise of digital platforms and the threat they pose to consumers and the competitive process. Addressing what it found to be Google’s and Facebook’s market power in a number of markets,[2] the report encouraged governments to be “responsive, and indeed proactive, in reacting to and anticipating challenges and problems” posed by digital platforms. It offered eleven preliminary recommendations to address these concerns, including: amending merger law to expressly consider potential competition and the data at issue in the transaction, requiring advance notice of any acquisition by a large digital platform of a business with activities in Australia, and tasking a regulatory authority with monitoring the conduct of vertically integrated digital platforms. The report also proposed areas for further analysis, such as: a digital platforms ombudsman, the monitoring of intermediary pricing and opt-in targeted advertising. As such, indications from Australia suggest calls for more competition intervention have some teeth.

The UK may have a similar appetite, as indicated by a new Parliament publication addressing “Disinformation and ‘fake news.’” The statement calls for increased oversight and greater transparency into “how the big tech companies work and what happens to our data,” highlighting Facebook’s treatment and monetization of user data as an example of why intervention is needed. In addition to recommending a compulsory Code of Ethics overseen by an independent regulator with “statutory powers to monitor relevant tech companies,” the publication advocated for greater competition law scrutiny of and enforcement against digital platforms, including an investigation of Facebook and a “comprehensive audit” of the social media advertising market. Invoking existing “legislative tools” such as privacy laws, data protection legislation, and antitrust and competition law, the report cautioned: “The big tech companies must not be allowed to expand exponentially, without constraint or proper regulatory oversight.”

Operating under an international patchwork of competition approaches can present a challenge to global enterprises. Technology-focused, data-intensive businesses should consider seeking antitrust counsel to monitor developing competition trends and implications across jurisdictions.

_________________________________

[1] Verizon Communic’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407-08 (2004).

[2] The preliminary report finds that Google has market power in online search, online search advertising and news media referral services, and that Facebook has market power in social media services, display advertising and news media referral services.