The EU’s Digital Markets Act (DMA) enters into force on 1 November 2022. It promises to be one of the most significant developments in the history of EU regulation, ushering in a new era for technology companies operating in the EU. In this communication we set out the background to the DMA, the companies whose services will be affected, the obligations that they will have, the consequences of non-compliance and the next steps in the DMA’s application.
In a judgment dated 13 July 2022 (T-227/21), the General Court of the European Union (the “General Court” or the “Court”) upheld the decision of the European Commission (the “Commission”) whereby the latter accepted to assert its (merger control) jurisdiction over the “below-the-thresholds” acquisition of Grail by Illumina (the “Transaction”), following referrals from EU and EFTA member states based on Article 22 of the EU Merger Regulation (“EUMR”).
In addition to its direct and almost immediate implications for Illumina and Grail (see below), this judgment paves the way for new cases that capture concentrations below the thresholds (i.e., not triggering merger control requirements based on the numerical thresholds) while leaving a few questions open.
It was indeed the first time, since the announcement by Margrethe Vestager of the Commission’s willingness to use Article 22 EUMR to tackle potentially problematic “below the thresholds” mergers, that the General Court was given the opportunity to have its say on this new approach.
Pursuant to Article 22 EUMR, national competition authorities (“NCAs”) may refer to the Commission any concentration that does not have a European dimension, but (i) which affects trade between Member States and (ii) threatens to significantly affect competition in the territory of the Member State concerned (see our previous Blog post on the Commission’s guidance published on 26 March 2021).
This provision was long conceived as a tool designed for EU Member States lacking national merger control regimes. Over recent years, however, there had been increasingly clear messages that the Commission wanted to use it for other purposes, namely to extend its jurisdiction to catch the so-called killer acquisitions, or more generally potentially problematic concentrations below the thresholds. But, before the issuance of the Commission’s guidance regarding the application of Article 22 EUMR on 26 March 2021, the rules of the game were not clear at all.
Made public in September 2020, before the release of the aforementioned guidance, the Illumina/Grail Transaction was not notified to any NCAs within the EU or to the Commission, as it did not cross any relevant thresholds. However, a complainant, as well as the Commission, has considered it a textbook case of a “killer acquisition.”
In this case, Grail is a start-up, not yet generating any turnover, developing innovative blood-based cancer tests based on genomic sequencing and data science tools. Reportedly, the alleged concern would be that the purchaser, Illumina, a U.S. major biotechnology company supplying sequencing and array-based solutions for genetic and genomic analysis, could post-transaction restrict access to or increase prices of next generation sequencers and reagents to the detriment of Grail’s rivals active in genomic cancer tests.
Likely informed of the Transaction by the complaint, the Commission reached the preliminary conclusion that the Transaction satisfied the necessary conditions for a referral. In accordance with Article 22(5) EUMR, the Commission informed the EU and EFTA Member States of the Transaction and invited them to request a referral (through a so-called “Invitation Letter”), and on 9 March 2021, the French competition authority sent a request (joined by the Dutch, Belgian, Norwegian, and Icelandic competition authorities). By decisions of 19 April 2021, the Commission accepted the referral request and associated requests to join (the “Decisions”).
Subsequently, Illumina, supported by Grail, initiated an action for annulment against both the Invitation Letter and the Decisions before the General Court of the EU, competent to rule on such annulments for acts of the institutions of the European Union that are contrary to European Union law.
The judgment at hand was much awaited as, by contrast with traditional guidelines which build upon a long decisional practice, the Commission’s guidance develops a new untested approach to Article 22 EUMR and has generated much debate amongst academics and practitioners about its legality.
Findings of the General Court
First ruling on the admissibility of the case, the General Court confirmed that the Commission’s Decisions constituted challengeable acts within the meaning of Article 263 of the Treaty on the Functioning of the European Union (“TFEU”), notably as each were considered to produce binding legal effects vis-à-vis Illumina and were thus capable of affecting its interests by bringing about a distinct change in its legal situation.
The Court thus rejected the European Commission’s position that its Decisions were merely preparatory acts, the illegalities of which could be raised in an action brought against the final decision on the concentration at issue. On the contrary, the Invitation Letter was considered to constitute only an intermediate step in the context of the referral procedure so that the Court held Illumina’s action against such letter to be inadmissible.
On the substance of the case, Illumina challenged the Commission’s Decisions on three points, essentially alleging: 1) a lack of competence on the part of the Commission, 2) that the referral request of France was late and 3) that the Decisions violated the principle of protection of legitimate expectations.
1° Article 22 EUMR is an adequate legal basis for the Commission to exercise its jurisdiction over the Transaction
Illumina argued that the Commission did not have a valid legal basis to review the transaction at issue, since the referral request was made by a competition authority which was not itself competent, under its own national legislation, to review the transaction. For Illumina, the residual purpose of Article 22 EUMR only enables a Member State that does not have a merger control legislation to submit a referral request in order to prevent a concentration affecting its territory from not being subject to any scrutiny.
Following a holistic review, through a literal, contextual, teleological and historical interpretation of the provision at issue, the Court concluded that the Commission was right to accept the referral request and the requests to join under Article 22 EUMR, thus confirming with a particular strength, the validity of this recent and major change in the Commission’s merger control policy.
Relying on the wording of Article 22(1) EUMR, and in particular the use of the expression “any concentration,” the Court took the view that a concentration could be the subject of a referral, regardless of the existence or scope of national merger control rule. Interpreting Article 22(1) EUMR otherwise, as Illumina and Grail advocated, would in fact add a condition for a referral that is not apparent from its wording, the Court added.
It also considered that although the referral mechanism was originally conceived, under the previous merger regulation 4064/89, primarily for Member States which did not have their own merger control system (in practice, the Kingdom of the Netherlands), it did not, however, preclude other Member States from also having recourse to that mechanism. For the Court, nothing in that regulation indicates that the EU legislature intended at the time to reserve that mechanism for those aforementioned States.
For the Court, while the scope of the EUMR depends primarily on the exceeding of the turnover thresholds defining the European dimension, it also depends, alternatively, on the referral mechanisms provided for in Article 4(5) and Article 22 of that regulation, which supplement those thresholds by authorising the examination, by the Commission, of certain concentrations that do not have such a European dimension. It further emphasized the distinction that was operated between the referral mechanism set forth under Article 4(5) EUMR, the “one-stop shop” threshold, which specifically requires 3 Member States having competence to review a transaction for it to be referred to the Commission, and the referral mechanism of Article 22, which does not provide such a condition.
Eventually, the Court found that referral mechanisms are an instrument necessary to remedy the control gaps inherent to a rigid system solely based on turnover thresholds. It considered that the use of the expression “effective corrective mechanism” in recital 11 of the EUMR, to describe referrals, shows that such mechanisms create a subsidiary power of the Commission which confers on it the flexibility necessary to achieve the objective of the regulation, namely, to allow for the control of concentrations that are likely to significantly impede effective competition in the internal market.
Accordingly, the General Court concluded that the Commission was right to accept the referral request at issue and that neither a legislative amendment nor a revision of the EU thresholds were necessary, contrary to what Illumina claimed.
2° The Transaction was lawfully referred to the Commission as the referral request was not late
Beyond the much-anticipated conclusion on the overall lawfulness of the referral request made by a non-competent NCA, the General Court’s judgment also provides clarifications as regards the deadline to be complied with by Member States to submit such a referral request, which, if helpful, still leaves open a number of questions.
As a reminder, the second subparagraph of Article 22(1) EUMR provides that a referral request “shall be made at most within 15 working days of the date on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned.”
Illumina, supported by Grail, argued that the referral request was submitted after the expiry of the time limit, since the Transaction was announced publicly through a press release and the CMA and the FTC had already started investigating the deal, which therefore was necessarily known to the French NCA.
The General Court rejected the argument and held that the concept of a concentration being “made known” within the meaning of the second subparagraph of Article 22(1) EUMR must, as regards its form, consist of the active transmission of relevant information to the Member State concerned and, as regards its content, contain sufficient information to enable that Member State to carry out a preliminary assessment.
According to that interpretation, the Court followed, the period of 15 working days laid down in that provision starts to run from the time when that information was transmitted, and in the present case, the information was transmitted through the Invitation Letter sent by the Commission, which eventually enabled the NCAs concerned to carry out a preliminary assessment of the required conditions. In consequence, the Court found that the referral request at issue was made on time since it was rightly made within 15 working days from receipt of the Invitation Letter.
The Court did note, however, that the Invitation Letter itself was sent within an unreasonable period of time as a period of 47 working days elapsed between receipt of the original complaint by the Commission and the sending of the Invitation Letter to the NCAs, a delay which the Court found to be unjustified. Nevertheless, the Court ruled that such an infringement of the reasonable time principle could not in the present situation justify the annulment of the Commission’s Decisions as it did not adversely affect the ability of Illumina or Grail to defend themselves effectively, such adverse effect being the legal standard to call into question the validity of an administrative procedure.
3° The recent shift in the Commission’s approach towards Article 22 EUMR does not violate the principle of protection of legitimate expectation
Finally, Illumina argued that the recent shift in the commission’s guidance on Article 22 violated its legitimate expectations since, at the time it agreed on the concentration with Grail, the Commission did not accept referral requests for concentrations that did not fall within the scope of national merger control rules. To that end, it pointed out to a specific speech made by Margrethe Vestager in September 2020 in which she confirmed that, at the time, the Commission was discouraging Member States to make use of such referral requests and that a change of approach would take place in the future. Illumina and Grail emphasized the clear and unconditional nature of that speech, as regards the process and timing of the implementation of the new referral policy. They also reminded that the Commission’s guidance on the application of the referral mechanism of Article 22 was adopted after the Invitation Letter was sent, without public consultation.
However, the Court dismissed such argumentation, reminding that a party’s right to rely on the principle of the protection of legitimate expectations presupposes the fulfilment of certain conditions set by the case law, notably that “precise, unconditional and consistent assurances originating from authorised, reliable sources have been given to the person concerned by the competent authorities of the European Union” and “has led him or her to entertain well-founded expectations.” In the present case, the Court held that Illumina failed to demonstrate the existence of such assurances. In particular, with regard to Margrethe Vestager’s speech that Illumina relied upon, the Court found that the Vice-President of the Commission simply stated in her general policy speech that it was time to change that past practice but did not make any commentary on the transaction. And since the speech occurred months before the transaction was even publicly announced, that speech could not contain precise, unconditional and consistent assurances in relation to the treatment of that specific concentration.
Furthermore, the Court noted that the fact that the Commission has a practice of discouraging NCAs from referring cases to it that they do not have the power to review themselves does not, in itself, precluded such referrals.
The Court added that because the contested Decisions were based on a correct interpretation of the scope of Article 22 EUMR (as developed supra in section 1°), Illumina could not rely on the reorientation of the Commission’s decision-making practice to claim any violation of the principle of legitimate expectation.
The General Court thus concluded by dismissing Illumina’s action in its entirety.
Given the novelty of the Article 22 doctrine and the absence of guidance thereof at the time of the contemplated Transaction, this is arguably a particularly harsh ruling against Illumina, with serious consequences. The Commission, which had temporarily halted its in-depth probe into the Transaction last February while waiting for the General Court’s ruling, may now resume its work. As for now, Illumina and Grail remain subject to the interim measures imposed by the Commission in October 2021 requiring, in particular, that Grail be kept separate, be run by independent managers and that the parties implement Chinese walls in order to avoid sharing confidential and strategic information. In parallel of the in-depth review and the interim measures, the Commission, just six days after the judgment, sent a statement of objections to Illumina alleging unlawful gun-jumping (i.e., violation of the standstill obligation). The latter had indeed publicly announced that it had completed its acquisition of Grail while the Commission’s in-depth investigation was still ongoing. What’s next? Illumina made public its intention to appeal the judgment almost immediately after its issuance. It may hence not be the end of the story.
About the impact of the ruling beyond the Illumina/Grail transaction, it vigorously reinforces the Commission’s expansion of jurisdiction over mergers below the thresholds and confirms the need, for companies, whatever the activities concerned, to adapt to this new legal framework and take into account the clear uncertainty that derives from a potential Article 22 referral.
This is even truer as Margrethe Vestager, commenting upon the judgment, declared “We have a few acquisitions within our sights that might be relevant candidates.” So, there are clearly more cases to come.
In this context, our recommendations made a few months back (see here) remain all the more relevant after this confirmation’s judgment.
Finally, one can only hope that in the future the Commission and the NCAs will use this new Article 22 approach sparingly, focusing on the highest risks’ cases.
 Article 22 EUMR provides that « one or more Member States may request the Commission to examine any concentration as defined in Article 3 that does not have a Community dimension within the meaning of Article 1 but affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States making the request. »
Following a trend towards protectionism that seems quite fashionable in many jurisdictions globally those days, the European Commission proposed, on 5 May 2021, a regulation on foreign subsidies distorting the internal market (hereafter “FSR”) intended to ensure a level playing field between companies subject to EU State aid rules and companies which are not.
On 30 June 2022, the co-legislators (EU Parliament and Member States) reached a political agreement on the text, meaning that the regulation could be formally adopted in the coming months and become effective as soon as 2023.
For people unfamiliar with EU State aid rules, the EU has a rather unique regime in place which aims at tackling government support, whatever its form, in favor of economic operators, which is likely to distort or distorts competition and trade within the EU. But, today, there is no equivalent set of rules that can be enforced in relation to subsidies received by economic operators from third countries. The traditional Section on subsidies contained in trade instruments or the Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union which are limited in their scope may indeed hardly qualify as an equivalent. This asymmetry was highly criticized over the past few years, as it was schematically deemed to put European companies at a disadvantage compared to foreign companies heavily subsidized by their home country (Chinese companies were particulary in the spotlight).
With the FSR, this asymmetry or enforcement gap shall now be history.
The FSR will provide the European Commission with new tools and powers to investigate foreign subsidies granted to companies that are engaged or will engage in economic activities in Europe and to remedy their distortive effects on competition.
Prior notification obligations for concentrations and public procurement bids meeting certain thresholds
In case of a merger, acquisition or creation of a full-function joint venture, the transaction will have to be notified to the European Commission prior to its implementation if the following cumulative thresholds are met:
(a) an annual turnover generated in the EU of at least EUR 500 million by the target of the acquisition, by any of the merging undertakings, or in the case of a joint venture, by the joint venture itself if it is established in the EU or by one of the parent companies if it is established in the EU; and
(b) subsidies amounting to at least EUR 50 million.
This review will run in parallel with the traditional EU merger control review (if also applicable).
In case of a public procurement procedure, a bid will have to be notified to the European Commission and the award of the contract put on hold if the following cumulative thresholds are met:
(a) the estimated contract value is at least EUR 250 million; and
(b) the bid involves a foreign subsidy of at least EUR 4 million by a single third country.
To ensure efficient control, the Commission will be vested with investigatory powers in that context (power to send information requests to companies, power to conduct fact-finding missions and inspections, etc…).
Following the notification, the Commission will be able to (i) prohibit the concentration or the award of the contract to the concerned bidder, (ii) impose behavioral and structural remedies or accept commitments, or (iii) issue full clearance. A breach of the notification obligation will potentially be fined up to 10% of the aggregated turnover of the undertakings concerned.
The Commission will also have the power to launch investigations on its own initiative into any other market situation where there is a suspicion of distortion of competition due to foreign subsidies. This includes but is not limited to concentrations and public procurement procedures where the thresholds above are not met. Again, the Commission will have investigatory powers as well as the power to impose fines on non-cooperative undertakings.
This is an innovative and very ambitious tool, which was finally drawn up in a relatively short period of time (less than 14 months) and for which a certain number of points will have to be clarified quickly for the sake of legal certainty.
It remains to be seen whether it will succeed in achieving its objectives and not produce (too many) undesirable effects. For example, there may be unintended consequences as this new regulation will not only affect state-controlled companies outside the EU, but all companies (including EU companies) that benefit from foreign subsidies while carrying out or preparing to carry out economic activities in Europe.
While waiting to see the first effects of the FSR, the efficiency of the European institutions in producing laws (be they hard or soft) and moving fast on competition/regulatory topics is to be commended, as it must be remembered that the FSR will be only one of many areas to be monitored in relation to competition enforcement in the EU, at a time when additional regulation (Digital Markets Act) is being put in place and current procedures and policies are being updated.
After the various measures taken by countries, international organizations and companies to pressure Russia to stop its aggression against Ukraine, it is now the turn of the antitrust enforcers of the European Competition Network (ECN) to make their contribution. They did so by publishing a joint statement on 22 March, in which they indicated that they would be pragmatic, if not flexible, in assessing the behaviour adopted by companies in response to the severe difficulties encountered in connection with the war. They emphasised that cooperation between companies to address war disruptions – for example to ensure the supply, purchase and fair distribution of scarce products and inputs, or to try to minimise the consequences of compliance with EU sanctions – would likely not be considered problematic under antitrust law. The European Antitrust Enforcers also added that they would not actively pursue those temporary and necessary cooperation measures, and that they would provide informal guidance to companies that had doubts about the compliance of such cooperation. However, the European Antitrust Enforcers pointed out that they would be ruthless with companies that take advantage of the crisis to collude at the expense of free competition. This initiative is reminiscent of the one they adopted in response to the COVID-19 crisis, which was perceived with some relief by companies placed under unprecedented constraints.
An article authored by Orrick attorneys has been nominated for a 2021 Antitrust Writing Award as a “Best Business Article” in the intellectual property category. The Awards Jury will select one winning article per category and the piece is also eligible for the “Reader Award” distinction, which is decided by popular vote.
You can view the article and cast your vote here:
“SEP Licensing in Supply Chains: ECJ Gets Opportunity for a Major Trend-Setting Decision,” by Lars Mesenbrink, Julius Schradin, and Jay Jurata
Voting closes on June 28, 2021.
The European Commission (“Commission”) is expanding its jurisdiction over transactions by encouraging national competition authorities (“NCAs”) of the EU Member States to ‘refer’ certain transactions to it that fall below the thresholds for mandatory notification at the EU and the national level. On 26 March 2021, the Commission published guidance (“Guidance”) setting out referrals that are ‘encouraged’ and how and when it will accept such referrals. This development has not required legislative changes (which would have taken some time and also required unanimity among EU Member States) but rather the Commission is resuscitating an existing provision, the so-called “Dutch clause”, namely Article 22 of the EU Merger Regulation (“EUMR”).
The Commission hopes to remedy what it perceives as an enforcement gap under the turnover-based thresholds for notification. In particular, this change in policy aims to catch transactions that would otherwise fall outside its jurisdiction as the turnover thresholds would not be met, but the parties otherwise have an important competitive position that is not reflected in their turnover, including so-called “killer acquisitions”. The Commission considers this to be a particular issue in the digital economy, pharmaceutical sector and other ‘innovation-driven’ sectors.
Only a couple of Member States (Austria and Germany) have implemented transaction value-based thresholds to catch acquisitions of companies with low turnover and high valuation. The Guidance allows the Commission to enable a more systematic EU-wide response.
The substantive test remains unchanged: the Commission will continue to assess whether there is a risk of significant impediment to effective competition (the “SIEC test”).
Transactions falling within the new policy
According to the Guidance, Article 22 referrals will be encouraged for transactions where the turnover of at least one party does not reflect its actual or future “competitive potential.” A non-exhaustive list of examples includes acquisitions of: (i) promising start-ups, (ii) “important innovators,” (iii) an “actual or potential important competitive force,” (iv) companies having access to key raw materials, infrastructure, data or IP rights, and (v) companies providing key inputs for other industries.
Whether a transaction is eligible for an Article 22 referral depends on two legal requirements: the transaction must (i) affect trade between Member States, and (ii) threaten to significantly affect competition within the territory of the Member State(s) making the request. The Commission provides examples of the relevant factors for the assessment of these criteria:
- Trade between Member States could be considered affected, for example, based on the location of potential customers, data collection, or likely future commercialisation of IP rights.
- The requirement of a threat to “significantly affect competition” within the relevant territory will be met if a preliminary assessment reveals a real risk that the transaction could result in the creation or strengthening of a dominant position, the elimination of an important competitive force (in particular, a new important innovator), the foreclosure from a market or supplies, and leveraging a strong market position from one market to another through exclusionary practices. The preliminary assessment conducted to verify this second criterion is without prejudice to the subsequent formal assessment of the transaction if the Commission accepts the referral.
The Commission intends to play an active role in the enforcement of the new policy. It is willing to “cooperate closely” with NCAs to identify transactions that would fall within the scope of this new policy, or even invite NCAs to invoke Article 22 in certain cases. Third parties are encouraged to contact the Commission or NCAs, if they consider a transaction appropriate for referral, provided they have sufficient evidence to enable a preliminary assessment.
The timing for referral is as follows:
- In cases where there is no mandatory filing at a national level, NCAs have 15 working days to request referral, starting from the date on which the transaction is made known to them (according to the Guidance, this is when sufficient information is available to make a preliminary assessment);
- The Commission will inform the other NCAs of the referral request “without delay”;
- Other NCAs then have 15 working days to join the initial request (direct communication between NCAs is also encouraged by the Commission); and
- After 10 additional working days, the Commission will be deemed to have adopted a decision to examine the transaction, if it has not already done so.
While the referral is subject to the deadlines set out above, the Commission is willing to accept Article 22 referrals up to six months after completion of the transaction or the transaction having become known in the EU (whichever is the later), or even later in “exceptional situations”.
Implications for parties to corporate transactions
Standstill effect and risk of gun jumping: The obligation not to close a transaction applies to transactions that have not completed at the date on which the Commission informs the parties that an Article 22 referral request has been made, after which the parties risk substantial gun jumping fines if they decide to close. The standstill obligation ceases if the Commission subsequently decides not to examine the concentration. The standstill obligation does not apply to transactions that have already completed before the Article 22 referral process is initiated such that no gun jumping fines can be incurred. The Commission will inform the parties as soon as possible if a referral is being considered to allow the parties to refrain from completing the transaction.
Duty to notify: Once the Commission has accepted Article 22 jurisdiction, the acquirer will be under a duty to notify the transaction under the standard notification procedure under the EUMR.
Potential effects on the transaction and risk of sanctions: Once the Commission has accepted jurisdiction, the transaction will be reviewed based on the standard substantive and procedural EUMR rules, which for transactions that raise concerns include the risk of remedies and in the worst-case scenario, a prohibition decision. If the transaction has not yet completed, there will be no real difference with the standard rules for notifiable transactions, although a decision to apply Article 22 adds to the timetable and may delay closing. However, effective remedies could prove difficult to implement for transactions that have already closed depending on the degree to which the acquired business has been integrated, particularly remedies requiring structural changes (e.g. full or partial divestment) to restore the situation pre-transaction.
The end of the “one stop shop” within the EU?: While under Article 22, the territorial jurisdiction is in theory limited to the EU Member States that have either referred the concentration to the Commission or joined the initial referral(s), the Commission takes into account the effects of a transaction in the rest of the EU whenever a relevant market has a geographic dimension larger than the referring Member State(s). This is likely to be the case in many digital and innovation markets potentially covered by the new policy and tech companies with global ambitions should assume that the Commission will investigate the effect of the transaction on an EU-wide basis.
The Guidance states that if a transaction has already been notified in one or more EU Member States that did not request a referral or join such referral request, this could be a factor against accepting a referral. However, for the purposes of legal certainty and considering potential for inconsistencies, in particular in relation to any remedies, we encourage the NCAs and the Commission to maintain a high level of cooperation to avoid overlapping investigations.
Our recommendations in light of the new policy
This is a major change to the Commission’s merger control policy. With this new policy, which is not limited to “Big Tech” or the digital economy (which has driven recent policy shifts or discourse relating to such shifts), EU merger control no longer provides for the legal certainty resulting from turnover-based notification thresholds. Several months of delay could be added between signing and closing, remedies could be imposed after the implementation of a transaction, and completed acquisitions might have to be unwound, all for transactions which prior to this policy change would not have faced any merger control review in the EU.
In light of this, transaction parties should consider:
Assessing the risk of falling within the scope of the new policy: Transaction parties should consider if a transaction falls within the categories of potential Article 22 referrals set out above. They should also consider if the transaction is likely to raise competition concerns – including through the strengthening of dominance/market power, access to advanced/innovative technology, R&D or data, or if the transaction involves a highly concentrated market, a target with a substantial user base or high projected growth, or meets merger control thresholds outside the EU. The rationale of the transaction and projected market developments will also be relevant factors in assessing if an Article 22 referral is likely.
Allocating risk and adapting transaction documents: Transaction agreements should be revised to take into account the risk of an Article 22 referral. In particular, agreements should allocate the risk of an Article 22 referral between buyers and sellers and include, or not include, as a condition precedent the absence of an Article 22 referral in the time period between signing and closing. If a transaction is likely to be referred, the acquirer may insist on having received from the Commission or NCAs confirmation that the transaction will not get referred under Article 22.
Strategically informing NCAs: At a national level, it might be beneficial to provide NCAs with enough information to allow a preliminary assessment of whether Article 22 referral is appropriate. Providing a sufficient level of detail should trigger the 15 working day deadline vis-à-vis the NCAs that have been provided with such information. It remains to be seen what level of cooperation will be achieved among NCAs; at this stage, it is not certain that informing one NCA would be regarded as informing all NCAs.
Reaching out to the Commission: While it is not yet clear what type of “comfort letter” the Commission is willing to provide, early communication with the Commission should help clarify whether a transaction is outside the scope of Article 22 referral, provided that sufficient information is made available to the Commission to make such assessment. This option should be particularly attractive in a competing bid scenario, or where competitors or other third parties otherwise may use the new Article 22 policy to scupper or delay a transaction.
New enforcement tool for the German Federal Cartel Office in the control of abusive behavior of companies with a paramount cross-market significance for competition
In a nutshell:
- What’s new?
- Introduction of the Concept of Intermediation Power: A dominant position can as of now also result from intermediation services of a company that is active in multisided markets.
- The German competition authority now has a new tool for intervention aiming at some types of large platforms’ conduct and other companies for which the authority established a so-called “paramount cross-market significance for competition”.
- Action items for our clients
- Follow the Federal Cartel Office’s approach with the new tool closely – we will keep you posted.
The 10th amendment carries the name “Act amending the Act against Restraints of Competition for a focused, proactive and digital Competition Law 4.0 and other provisions (ARC Digitization Act)” and, as the name suggests, comprises the legislature’s intent to adapt German competition regulation to the new competitive environment in digital markets, in particular with respect to the controversial behavior of “gatekeeper” companies with superior market power like Google and Amazon. Hence, a core element of the amendment is the modernization of regulations on the control of abusive practices, in particular, the introduction of a new section 19a ARC (Act against Restraints of Competition) on abusive conduct of companies with a paramount cross-market significance for competition.
For the first time, section 19a ARC enables the Federal Cartel Office to intervene at an early stage in the event of threats to competition from certain large companies by determining that a company, which is active to a considerable extent in multisided markets, is of paramount importance for competition across markets, i.e., companies whose strategic position and resources make them particularly important for competition across markets. Under specific circumstances, the Federal Cartel Office can preventively prohibit such companies from certain practices, including:
1. Prohibition of “self-preferencing”, i.e., prohibition of giving preferential treatment to the company’s own offerings over those of competitors, in particular in terms of presentation and pre-installing exclusively the company’s own offerings on devices (a situation prominently discussed in the “Google-Shopping” case of the EU Commission);
2. Prohibition of measures of the company that impede third companies in their activities in a buyer’s or seller’s market if the company’s activity is important for the access to these markets;
3. Prohibition of impeding competitors in a market in which the company may quickly expand its market position;
4. Prohibition to erect or appreciably raise barriers to market entry or otherwise hinder other companies by processing competitively sensitive data collected by the company, or to impose business conditions that permit such processing;
5. Prohibition to impede or deny interoperability with other services and data portability, and thereby hinder competition;
6. Prohibition to inadequately inform other companies about the scope, quality or success of the service provided or commissioned or to make it difficult for them to assess the value of this service in another way; and
7. Prohibition to request advantages for treating offers of another company that are not appropriate in relation to the reason for the request.
The legislature also underpins the effectiveness of the new provision by accelerating the appeal proceedings. Appeals against decisions of the Federal Cartel Office made on the basis of section 19a ARC will be decided directly by the Federal Court of Justice. Skipping the first competent instance for all other antitrust proceedings, the Düsseldorf Higher Regional Court, will result in considerable time savings in these fast-moving markets.
In addition, the legislature has specified the provisions for the traditional control of abusive practices and expanded them to include internet-specific criteria. When measuring market power, the law now also provides that access to competition-relevant data and the question of whether a platform has so-called intermediation power are to be taken into account. Such a key position in the intermediation of services can establish a dependency relevant under antitrust law.
With regard to the regulations for companies with relative or superior market power, the scope of protection is no longer limited to small and medium-sized enterprises. Another important innovation is that the Federal Cartel Office can, under certain conditions, order that data access is granted for an appropriate fee in favor of dependent companies. In addition, special intervention options are provided for the event that a platform market threatens to “tip” in the direction of a large provider (so-called “tipping” of a market).
The resources of the Federal Cartel Office, which are freed up by the increase of the merger thresholds (see our blog post on New merger control thresholds in Germany), will likely be used to initiate more sector inquiries and, subsequently, will lead to more decisions under the new sections in 19a GWB.
It remains to be seen how the concept of addressing abusive conduct of companies with a paramount cross-market significance under section 19a GWB will influence the legislative process of the Digital Markets Act on the EU level (see our blog post New obligations and sanctions for digital ‘gatekeepers’: European Commission proposes Digital Market Act).
The UK is introducing a new far-reaching national security regime which will impact M&A activity in Tech, Energy, Finance and other sectors. Orrick Partner Douglas Lahnborg, on 3 February 2021, hosted a webinar with panellists Niall Mackenzie (Department for Business, Energy & Industrial Strategy), Tim Riisager (Centrica), Alex van Someren (Amadeus Capital Partners) and Tom Tugendhat MP (Chairman of the Foreign Affairs Committee), who shared valuable insights for businesses and their advisors into the National Security and Investment Bill.
Watch a recording of the discussion here and listen to this experienced panel share their views on points such as what businesses should do now if they are concerned that a transaction may fall within the scope of the regime, the timing of the Bill, definition of “national security”, changes to the structuring of transactions, expectations on the newly-created Investment Security Unit and whether this is the first of a suite of legislation and policy that we will see from the government to address national security concerns in transactions involving entities or assets with links to the UK.
The German Government is about to tighten the control of foreign direct investments (FDI) in German companies—again! The suggested changes might impede or at least delay non-EU (in reality mainly U.S.…) investments in German start-ups although such non-EU investments have in particular in the growth stage become vital for the developing German ecosystem over the last years…
In a nutshell:
- What’s new?
- German Ministry for Economics once again proposes to broaden the scope of FDI control.
- This time, German FDI control faces a major overhaul: the latest draft covers more than 27 business areas in which an investment can trigger a mandatory notification and standstill obligation for non-EU investors.
- Many more minority investments, including VC investments, could be subject to the proposed FDI control if an investor acquires at least 10% of the voting rights. Unlike merger control, there is no turnover threshold for the FDI regime.
- The good
- To be determined…
- The ugly
- The proposed amendment will possibly lead to significant delays for non-EU investors.
- Investors that already hold at least 10% of the voting rights and acquire additional voting rights can also trigger such a mandatory notification and standstill obligation.
- In the future, non-EU investors will likely face a competitive disadvantage compared to their EU competitors.
- Action items for our clients
- Check transactions that are currently being negotiated and determine if they can be completed before the proposed amendment becomes effective.
- Review your plans for future acquisitions and investments to account for potential significant delays. Solid preparation will become even more critical.
- Going forward: The Ministry has launched public consultations on the draft of the FDI amendment—keep an eye on this development! Of course, we will keep you posted.
After the latest amendment of Foreign Trade and Payments Ordinance in October 2020, the now proposed amendment is the 4th amendment of the relevant German FDI regulation within the past 12 months. While prior amendments extended the review scope to specific business areas (e.g., companies active in the production of certain medical equipment due to the COVID pandemic), the proposed amendment specifies the requirements of the EU Screening Regulation. It will broaden the scope of German FDI control extensively, in particular with respect to critical technologies that are of (security) relevance.
Remember the good old times four amendments ago: While a year ago, the prohibition of an investment required a threat to the public order or security of the Federal Republic of Germany, it now suffices that public order or security of the Federal Republic of Germany or of another EU Member State is likely to be impaired as a result of the investment.
Investments in certain businesses in Germany that will result in the investor holding at least 10 percent of the voting rights can trigger a mandatory notification to the Ministry and a standstill obligation. This can include, among others, investments in companies that:
- Provide cloud computing services and the infrastructures used for this purpose;
- Develop or manufacture goods which solve specific application problems by means of artificial intelligence methods and are capable of independently optimizing their algorithm;
- Develop or manufacture motor vehicles or unmanned aerial vehicles that have technical equipment for the control of highly automated, fully automated or autonomous driving or navigation functions, or the components essential for the control of such driving or navigation functions or software required for this purpose;
- Develop or manufacture industrial robots, including software or technology therefor, or provides specific related IT services;
- Develop, manufacture or refine certain types of semiconductors, optical circuits and manufacturing or processing tools for such products;
- Develop or manufacture certain IT products or components of such products;
- Operate, develop or manufacture certain dual-use goods;
- Develop or manufacture goods used to produce components for industrial applications by means of additive manufacturing processes;
- Extract, process or refine critical raw materials or their ores.
Since the Ministry launched a public consultation, interested parties have the opportunity until 26 February 2021 to provide detailed comments on the proposed amendment. In view of the technical complexity of the aspects to be regulated, the Ministry attributes particular importance to the results of this consultation. Even though this should not be regarded as an indication for the Ministry narrowing the scope, it could result in a more precise description of the relevant business areas which will facilitate a prior assessment of the notification obligations.
In a Nutshell
- What’s new?
- Significantly increased turnover thresholds for German merger control.
- The good
- Many transactions will no longer be subject to German merger control.
- This will lead to a much smoother process for lots of transactions, specifically for our clients in the tech sector and start-up companies that have not generated more than 17.5 mn in Germany.
- The ugly
- Transactions can still be subject to German merger control even if the increased thresholds are not triggered.
- The Federal Cartel Office can require filings from a company after having conducted a market inquiry.
- The review period for so-called phase 2 proceedings was extended from four to five months.
- In 2017, consideration of the transaction threshold with the requirement of the rather vague criterion “substantial domestic operations” was introduced and is still in effect.
- Action items for our clients
- Check transactions that are currently being negotiated or that have already been signed – they might benefit from the increased thresholds of not requiring merger clearance in Germany anymore.
- Going forward: Have a look at the Federal Cartel Office’s approach on the “vague thresholds” and sector inquiries – we will keep you posted.
The 10th amendment of the German Act against Restraints of Competition (ARC) does not only introduce a new enforcement tool concerning the control of abusive practices. The amendment also brings a significant increase of the turnover thresholds in merger control. This will lead to a significant reduction of merger control filing requirements – good news for transactions!
Most transactions in Germany are only subject to a notification if the companies involved achieve certain minimum turnover worldwide and in Germany. With respect to the turnover threshold, from now on, transactions will only be subject to merger control if, among other things, one of the companies involved has annual sales of at least 50 million euros in Germany (instead of 25 million previously) and, in addition, another company involved has annual sales in Germany of at least 17.5 million euros (instead of five million previously). Officially, this increase is intended to ease the bureaucratic burden on companies. However, the fact that the Federal Cartel Office received around 1,200 merger notifications in 2020 and opened in-depth investigations (phase II) in only 7 cases indicates that the Federal Cartel Office intends to focus its resources more efficiently on problematic cases. This is accompanied by the extension from four to five months of the review period for in-depth investigations.
For our business clients dealing with unproblematic transactions from an antitrust perspective, this is certainly good news as there will be no delay due to a merger control filing. However, besides these mere turnover thresholds, there is another threshold that takes into account the value of the transaction and competitive potential that has been in force since 2017 and is particularly important to our tech clients. We will keep you posted if the Federal Cartel Office focuses on this threshold in the future.
Further, the Federal Cartel Office is now able to require companies in certain sectors of the economy to notify mergers even if the companies involved in the transaction do not meet turnover thresholds mentioned above. According to the newly introduced section 39a ARC, the Federal Cartel Office can request notifications from a company if the following conditions are met:
- The acquirer must generate a worldwide turnover of more than 500 million euros;
- There must be objectively verifiable indications demonstrating that future acquisitions by the acquirer may significantly impede effective competition in Germany in the specified sectors;
- The acquirer holds at least a 15% market share in Germany in the specified sector; and
- The Federal Cartel Office must have carried out a sector inquiry of the industry in question.
Once a company is subject to such a notification obligation, it is obliged to notify the Federal Cartel Office about any acquisition in the specified sector(s), provided that
- the target’s global turnover exceeded 2 million euros in its last fiscal year, and
- more than two-thirds of the target’s turnover were generated in Germany.
Sector inquiries are investigations by the Federal Cartel Office of a specific sector of the economy if certain circumstances give rise to the assumption that competition of such a specific sector may be restricted or distorted. In the course of a sector inquiry, the supply and demand structures as well as aspects of market activity which have an impact on competition are analyzed by the Federal Cartel Office. A sector inquiry is not a procedure against specific companies. However, proceedings by the Federal Cartel Office are often a follow-up to a sector inquiry if the sector inquiry raises sufficient initial suspicion of a violation of competition regulations.
Andreas Mundt, President of the Federal Cartel Office, indicated the ambivalence of the new thresholds from an enforcement point of view:
“So far, we have controlled around 1,200 mergers year after year; including many cases that are not really relevant from a competition point of view. That is a considerable number, and one that is accompanied by a very heavy workload. In principle, we therefore welcome an increase in the thresholds. However, at the level now selected, one or two questionable cases are likely to disappear. With the resources freed up, we will be able to focus even better on the really critical cases.“
This shows the shift in the way the Federal Cartel Office obtains information on critical cases and markets. The previous approach relied heavily on a large number of “unproblematic” merger notifications, which provided the Federal Cartel Office with the parties’ view on markets and competition.
In the future, the Federal Cartel Office will put an emphasis on gaining information through sector inquiries. This shift also results in the elimination of the obligation to inform the Federal Cartel Office about the successful closing of a transaction. Previously, such a notification had to be submitted to the Federal Cartel Office for statistical purposes.
From a company’s point of view, the significant increase of the thresholds is welcomed as it will relieve companies from “pro forma” notifications. This applies, in particular, to PE funds. The new thresholds refer to the last completed business year prior to closing. Thus, transactions that are currently being negotiated or have already been signed but not yet closed could benefit from these new thresholds as well.
The increased thresholds will also free resources at the Federal Cartel Office, which will likely be used to conduct more sector inquiries and, subsequently, to prepare decisions under the new sections 39a and 19a GWB. Companies that are affected by such a sector inquiry and interested third parties will have the opportunity to provide the Federal Cartel Office with their views and arguments on the competitive environment in their market(s) and may highlight potentially controversial market conduct of (rival) market participants. This might be seen as a good opportunity to shine the spotlight in the right direction.
The 10th amendment became necessary due to the implementation of the ECNplus Directive. The implementation of the so-called ECNplus Directive will strengthen the effectiveness of antitrust prosecution. In conjunction with the system in place at the EU level, companies and their employees are now obliged to cooperate by clarifying these facts.
The amendment also contains various innovations in the area of fine regulations. For example, “reasonable and effective precautions taken in advance to avoid and detect infringements” (i.e., compliance measures) can be considered mitigating circumstances in the future assessment of fines. In addition, the leniency program has now been codified into law. The Federal Cartel Office will adapt its announcements in this regard. Leniency applications can of course still be submitted at any time.
The debate about competition issues and unfair practices specific to online platforms and the appropriate tools to tackle them was taken a step further by the European Commission (‘Commission’), which presented two legislative proposals on 15 December 2020: The Digital Services Act (‘DSA’) and the Digital Markets Act (‘DMA’). While the former is intended to regulate online content and increase transparency and accountability, the latter is intended to ensure contestable and fair markets in the digital sector by imposing limits (and potentially sanctions) on so-called ‘gatekeepers’. This post focuses on the latter. The DMA is the confirmation that, from the Commission’s point of view, the competition law toolbox does not perfectly address the new challenges encountered in the digital sector. Designed more specifically at tackling unfair practices and closing (what is perceived by the Commission as) an enforcement gap, the DMA complements the competition law toolbox with new obligations for market players and new control and enforcement tools for the Commission.
Identifying the gatekeepers
The first potentially contentious issue concerns the determination of the subject-matter of the DMA.
Digital platforms will have to assess whether the DMA applies to them. During the press presentation, the two commissioners in charge, Margrethe Vestager, Executive Vice-President for a Europe fit for the Digital Age (and continued head of DG Competition), and Thierry Breton, Commissioner for Internal Market, refrained from naming any specific platform.
The DMA establishes a concept of ‘gatekeeper’, which refers to providers of ‘core platform services’. These services include online intermediation, search engines, social networks, video-sharing platforms, online-communication, operating systems, cloud computing, as well as related advertising.
More specifically, the proposal sets out three cumulative criteria for defining ‘gatekeepers’: the provider must (i) have a significant impact, (ii) act as an ‘important gateway for business users to reach end users’ and (iii) enjoy an ‘entrenched and durable position’ or will foreseeably do so in the near future.
The Commission will presume that these criteria are fulfilled above the following quantitative thresholds:
a) for criterion (i) above, where the provider has an annual turnover in the EEA of at least EUR 6.5 billion in the last three financial years or market capitalization or market value of at least EUR 65 billion in the last financial year and it provides a core platform service in at least three Member States; or
b) for criterion (ii) above, where, in the last financial year, the core platform service had more than 45 million monthly active EU end users and 10,000 yearly active EU business users; or
c) for criterion (iii) above, where the provider meets the two thresholds mentioned in b) for each of the last three financial years.
The gatekeeper status will result from a Commission assessment and subsequent decision, but providers will have an obligation to self-assess and report themselves to the Commission when they meet the thresholds for the presumption to apply.
The presumption is rebuttable: a provider meeting the thresholds can argue that it does not fulfil the gatekeeper criteria. The Commission can also identify a gatekeeper even when not all the thresholds are met. A list of gatekeepers will be published and maintained to take into account market developments.
Specific duties and prohibitions
Regarding behavior, the DMA contains a list of Do’s and Don’ts for gatekeepers.
A first set listed in Article 5 of the DMA applies per se and needs no further details for the gatekeepers to fully comply with and be held responsible if they do not. For the second set listed in Article 6 of the DMA, the Commission may impose specific, more precise measures on a gatekeeper.
Obligations for gatekeepers
Obligations for gatekeepers susceptible of being further specified
Regarding acquisitions, the DMA introduces an obligation for gatekeepers to inform the Commission of any intended concentrations in the digital sector, even for transactions falling outside the scope of EU or national merger control regimes.
Enforcement powers for the Commission (EU level intervention)
The Commission will have several tools to monitor gatekeepers and sanction lack of compliance: market investigations, investigative proceedings (including requests for information, interviews, on-site inspections), interim measures in case of emergency, noncompliance decisions, and ultimately fines up to 10% of the gatekeeper’s worldwide annual turnover and periodic penalty payments up to 5% of the average daily turnover. A provider will be able to make commitments to avoid a noncompliance decision and sanctions.
Limited intervention at national level
For the sake of a uniform and coherent response to unfair practices implemented by gatekeepers within the EU, the proposed legislation takes the form of a Regulation, directly enforceable within the EU, meaning that it will apply without the need for Member States to adopt national rules. The DMA lays down harmonized rules and Member States must not impose further obligations specific to gatekeepers, be it by way of national legislation, administrative action or else. The only way for Member States to intervene is when at least three of them jointly request the Commission to open an investigation. Regarding public enforcement, no specific role is foreseen for national competition authorities.
However, private damages are still handled at national level. The DMA leaves room for business users and end-users of core platform services provided by gatekeepers to claim damages for the unfair behaviour of gatekeepers before national courts.
Not yet a reality – the legislative process ahead
The current version of the DMA is still likely to change as it will undergo the normal EU legislative process involving the European Parliament and national governments via the European Council. According to the Commission, the search for a broad political consensus was already part of the preparatory phase, so that the final legislative act is anticipated to be adopted rather rapidly, in about one and a half years. Add the proposed six-month delay between entry into force and application, and the DMA could apply beginning of 2023. Yet, the real pressure against the proposal will probably come from providers likely to be identified as gatekeepers and that had already made their objections known during the public consultation launched by the European Commission prior to the drafting of the DMA.
In a decision of November 26, 2020 in a patent infringement case of Nokia Technologies Oy against Daimler AG, the Düsseldorf Regional Court (file number 4c O 17/19) referred several questions to the European Court of Justice (ECJ) regarding the licensing of standard essential patents (SEPs) within multi-level supply chains. The Düsseldorf Regional Court suspended the infringement action until the decision of the ECJ. These questions referred to the ECJ address whether SEP owners are obligated to make licenses available to upstream component suppliers and the implications for the failure to do so, which are some of the biggest unresolved disputes involving SEPs. The questions also seek clarification on some of the “safe harbour” requirements for seeking injunctions set forth in the ECJ’s decision in the Huawei./. ZTE case (judgment of July 16,2015, C170/13).
In the lawsuit, Nokia is seeking an injunction against Daimler for an infringement of the German part of its European patent EP 2 087 629 B1. The patent concerns a method for sending data in a telecommunications system, whereby the patent is essential for the LTE standard (4G). LTE-capable modules from various suppliers of automotive parts make use of this standard. These modules are installed in cars of the automobile manufacturer Daimler and enable mobile radio-based services such as music or data streaming and/or over-the-air updates of specific software in cars.
In September 2014, Nokia’s predecessor in title indicated that it considered its patent essential to the LTE standard and issued a statement committing to grant licenses to third parties on terms that are fair, reasonable and non-discriminatory (FRAND). Both Daimler and many of its suppliers have so far used the patent without paying royalties.
Nokia argues that, as the owner of an SEP, it is free to decide at which stage of a complex production and supply chain it grants licenses on FRAND terms.
In contrast, Daimler and its upstream component suppliers argue that, based on the rules of the EU internal market and the FRAND declaration of September 2014, Nokia, as the owner of the SEP, must offer every license seeker, who is willing to obtain a license for the SEP, an individual unlimited license for all patent-relevant types of use of the SEP. Therefore, priority should be given to the license-seeking suppliers, which would correspond to the standard procedure in the automotive industry.
In the referral decision, the Düsseldorf Regional Court assumed that Nokia has a claim for injunction against Daimler due to a patent infringement. However, the court raises the question whether Nokia’s assertion of its injunctive relief against Daimler can be regarded as an abuse of its undisputed dominant position in the licensing market. The decisive question would be whether and, if so, under which circumstances the owner of an SEP abuses his dominant position if he files an action for injunction on the grounds of a patent infringement against the seller of an end product without first having complied with the licensing request of the suppliers that use the SEP as well.
Specific questions referred to the ECJ
- May a company, that is active on a downstream economic level, raise the objection of an abuse of a dominant position within the meaning of Art. 102 TFEU against an action for injunction due to the infringement of an SEP, if the standard (or a part of the standard) is already implemented in an intermediate product purchased by the infringing party whose supplier are willing to obtain a license and the patent owner refuses to grant an unlimited license for all patent-relevant types of use under FRAND conditions for products implementing the standard?
- Does the prohibition of an abuse of a dominant position require that the supplier be granted its own unlimited license for all types of use on FRAND terms for products implementing the standard in the sense that the final seller (and possibly the upstream buyers) in turn no longer need a separate license from the SEP owner in order to avoid the infringement of the patent through the intended use of the relevant parts of the suppliers?
- If the question 1) is answered in the negative: Does Article 102 TFEU impose specific qualitative, quantitative and/or other requirements on the criteria according to which the owner of an SEP decides against which potential patent infringers at different levels of the same production and exploitation chain he takes action for injunction?
- Notwithstanding of the, fact that the duties of conduct to be performed by an SEP owner and an SEP user (notification of infringement, licensing request, FRAND license offer; license offer to the supplier to be licensed with priority) must be fulfilled prior to a court proceeding, is it possible to make up for duties of conduct that were missed prior to a court proceeding in the course of a court proceeding?
- Can a considerable licensing request by the patent user only be assumed if a comprehensive assessment of all accompanying circumstances clearly and unambiguously shows the intention and willingness of the SEP user to conclude a license agreement with the SEP owner on FRAND conditions, whatever these (in the absence of a license offer not foreseeable) FRAND conditions may look like?
Timing and Implications
It likely will take between one to two years until the questions are fully briefed and the ECJ rules on the questions.
Notwithstanding the delay, these questions will provide the ECJ with an important opportunity to make a decision that will have a major impact on supply chains around the globe. They also will reduce the likelihood, pending the ECJ’s decision, that courts in Europe will issue injunctions against automotive manufacturers for cellular SEPs when upstream telematic component manufacturers are willing to enter FRAND licenses. Finally, they likely will influence ongoing efforts by the European Commission to provide policy guidance to improve transparency and predictability in SEP licensing.
The answers of the ECJ will give guidance and can be expected to have a tremendous effect not only in the automotive industry, but for any industry that relies on SEPs. The further proceedings will, thus, need to be followed closely.
The EU State Aid regime has long protected the EU internal market from anti-competitive subsidies granted by EU Member States. On 17 June 2020, the European Commission published a White Paper that proposes a new set of tools designed to address distortive effects in the internal market caused by subsidies granted by states outside the EU.
The White Paper outlines three complementary tools, or “modules”, intended to tackle the distortive competitive effects arising from foreign subsidies. These modules would be implemented by “supervisory authorities”, possibly at EU-level (most likely by the Commission itself) and/or at national level by an authority chosen by the Member State. For each of the three modules, the existence of a foreign subsidy with an actual or potential disruptive effect in the EU would be assessed in a “preliminary review”, potentially followed by an “in-depth investigation”. Undertakings under investigation could face “redressive measures” including the prohibition or even unwinding of certain transactions, or else make commitments to avoid prohibition. Failure to comply with procedural obligations would be subject to fines and periodic penalty payments.
Module 1 – General instrument to capture distortive effects of foreign subsidies
This largely mirrors the existing EU State Aid regime that applies to states in the European Economic Area (EEA). It proposes a general instrument that could capture all distortive effects of foreign subsidies exceeding a certain threshold, currently proposed at EUR 200,000 over three consecutive years. The Commission lists several categories of distortive subsidies, i.e. foreign subsidies that would distort the EU’s internal market: export financing, debt relief to the benefit of ailing undertakings, unlimited government guarantees, individual tax reliefs and foreign subsidies directly facilitating an acquisition.
For all other forms of subsidies, a more detailed assessment would be necessary, based on indicators such as the size of the subsidy, the size of the beneficiary and the utilisation of production capacity, the market situation, specific behaviour such as outbidding in acquisitions or distortive bidding in procurement procedures, and the level of activity of the beneficiary in the EU. If a distortive effect is established, it would be weighed up against any positive impact (the “EU interest test”), taking into account EU objectives such as job creation, climate neutrality goals, digital transformation, security, public order, public safety and resilience. Redressive measures could range from structural remedies and behavioural measures, to redressive payments to the EU, or the Member States, and could be subject to a limitation period of ten years.
Module 2 – Control of acquisitions facilitated by foreign subsidies
This proposes to tackle subsidised acquisitions of EU businesses by introducing an ex ante notification system, separate from and complementary to EU merger control and foreign direct investment screening. This module would investigate direct facilitation of acquisitions by foreign subsidies, as well as indirect de facto facilitation when foreign subsidies increase the acquirer’s financial strength. The regime would be subject to certain quantitative and qualitative thresholds and cover not only the acquisition of control over EU targets, but also the acquisition of significant – but possibly non-controlling – minority rights or shareholdings. The time period for the benefit of foreign subsidies would be limited, e.g. from three years prior to the notification until one year after closing. To avoid a prohibition of the planned transaction the acquirer could offer commitments, which would likely have to include structural remedies.
The proposals also envisage an ex officio review process to scrutinise acquisitions that should have been notified by the acquirer but were not, including after they have completed. The module includes the right to order the unwinding of completed transactions.
Module 3 – Control of unfair advantages in public procurement due to foreign subsidies
This complements the public procurement regime by introducing an additional notification obligation when submitting a bid, where the bidding party has received a “financial contribution” in the last three years. This module would address direct distortion of a procurement procedure by operation-specific foreign subsidies, as well as indirect de facto distortion by increasing the financial strength of the operator. The Commission aims to avoid situations where artificially low public procurement bids are facilitated by foreign subsidies. If a bidder is found to benefit from foreign subsidies, it could be excluded from public procurement in the EU.
The White Paper also identifies a risk that foreign subsidies create unfairness in the context of EU funding. The proposals are less developed, but the solution could be similar to Module 3 where EU funding is distributed through public tenders.
Hurdles and next steps
A first obstacle might be resistance by national governments that will scrutinise the proposal – the outcome of this process will influence the distribution of powers between the Commission and the Member States. For the general instrument (Module 1) as well as the public procurement instrument (Module 3), it is proposed that the Commission and the relevant national authorities would have concurrent authority for the initial stages. However, the Commission proposes to be exclusively competent to apply the EU interest test. Similar to its “one-stop shop” role in EU merger control, the Commission envisages exclusive responsibility for the enforcement of the ex ante control of acquisitions facilitated by foreign subsidies (Module 2).
In any event, enforcement outside the EEA will largely depend on third countries’ willingness to co-operate, which is not a given. State aid is highly political – foreign countries are unlikely to give the EU access to detailed information, unless the benefit of achieving EU approval outweighs the intrusion in the foreign state’s autonomy and political process. While the White Paper proposes an obligation to provide information, as well as powers to impose a fine or to order parties to unwind a transaction, the lack of effective enforcement outside the EEA could jeopardize the new regime(s). Even providing the supervisory authorities with the possibility to make decisions based on the facts available would not fully address this fundamental and intrinsic weakness.
Conversely, foreign companies benefiting from subsidies may lack information that would enable them to argue either the absence of a distortive effect, or the benefits outweighing such distortive effects. These dynamics could cause a stalemate between the EU and foreign countries, with increased trade barriers as a result.
The Commission acknowledges that there might be overlaps with existing legal tools, including international law such as the WTO Agreement on Subsidies and Countervailing Measures (for goods), as well as bilateral free trade agreements with third states, which may contain relevant dispute settlement or consultation provisions. In case of overlapping actions, the White Paper merely suggests the ability to suspend the proceedings under the proposed new instruments and to conditionally resume those if the distortion persists.
A public consultation is open for stakeholders to comment on the White Paper until 23 September 2020, with proposed legislation scheduled for 2021. Legislation is unlikely to come into force before 2022.
In a welcomed attempt to align their approaches, the antitrust enforcers of the European Competition Network (ECN)1 have published a brief joint statement on the application of competition law during the Covid-19 crisis.
If one may regret that its content remains too high-level, it is an important step, which comes just shortly after the European Commission adopted a specific temporary State Aid framework in order to offer Member States the flexibility required in this exceptional context to support businesses impacted by the critical disruptions caused by the Covid-19 outbreak (commented here).
In addition to flexible public support measures, businesses need more clarity as to whether they can similarly benefit from a flexible enforcement of antitrust rules. At a time where businesses are put under considerable pressure, no one seems to question the fact that increased cooperation between them may be necessary, not to say indispensable for some economic sectors to continue to address basic consumers’ needs; likewise, there are reasons to believe that the traditional special responsibility of dominant firms may be harder to assume in the current circumstances.
Here and there, voices have rapidly been raised about the need to explicitly relax competition laws or their enforcement to allow companies to continue to meet European consumers’ vital needs while not dreading subsequent antitrust investigations (see for instance: the public statement issued by EuroCommerce, a trade association of European retail and wholesale companies, advocating for a waiver of normal competition rules to allow retailers to “share information on supplies and arrang[e] deliveries to the homes of people who cannot get out”).
At the same time, faced with the risk of a generalization of inflated prices for products or services in high demand due to the pandemic, antitrust enforcers naturally feel the need to be extra-vigilant and ensure that adequate safeguards remain in place, despite their own challenges of having (at least for some of them) their personnel working from home. It explains why some enforcers (such as the German Federal Cartel Office) have been vocal about the fact that existing competition law rules already provided sufficient flexibility and that they would continue to crack down on those who would unduly take advantage of the crisis to adopt anticompetitive conducts.
The guidance offered in the ECN’s joint statement strikes a balance between encouraging good-faith solutions and preventing abuses. It combines different approaches that have previously been supported by some European antitrust enforcers. But let’s make no mistake: the underlying message is clear: antitrust rules may bend but will not break, meaning that companies shall not lower their guard and ensure that they take adequate steps to mitigate the antitrust risks.
Flexible antitrust to ensure continued supply
In its joint statement, after acknowledging that “this extraordinary situation may trigger the need for companies to cooperate in order to ensure the supply and fair distribution of scarce products to all consumers”, the ECN assures that it “will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply”.
The ECN statement yet continues by stressing that “such measures” are likely to already comply with existing competition law, since they would either not be caught by the antitrust prohibitions or would fall under the existing exemptions. In other words, the message is that businesses will benefit from flexibility where this is justified by the Covid-19 pandemic, mostly because this flexibility is already an inherent part of the existing antitrust regime.
While nothing is said about what would be accepted as “necessary measures” or what is meant by “temporary” measures, some illustrations may already be found in decisions concerning topical sectors taken by some national enforcers. For instance, the Norwegian antitrust enforcer recently approved a three-month cooperation between Norwegian airlines in order to allow them to continue to ensure critical activities for citizens. Likewise, the German Cartel Office seems to have taken a softened approach to cooperation in the retail sector to the extent it is necessary to ensure continuous supply.
If useful, these precedents, however, leave numerous questions unaddressed.
To help companies navigate these issues, the members of the ECN seem willing to provide “informal guidance” to companies, which is a good thing in theory but clearly does not provide the same level of comfort as proper formal decisions. One may also have some doubts as to the enforcers’ ability to respond adequately in a timely manner to consultations considering that many of them have already made it clear that stakeholders needed to be prepared to face significant delays in the handling of pending investigations and merger control reviews.
It is hence to be hoped for that the members of the ECN will take inspiration from the UK CMA and will shortly, individually or jointly, follow-up with more detailed guidance.
Flexible antitrust to avoid excessive price increases
To tackle the other main issue, the risk of exaggerated inflation, the ECN joint statement contains a warning to companies that prices of “products considered essential to protect the health of consumers in the current situation (e.g., face masks and sanitising gel)” should “remain available at competitive prices” and that antitrust enforcement will continue to fight against antitrust infringements such as cartels or abuses of dominance. To the same end, the ECN joint statement also explicitly recalls that manufacturers can continue to use their right to set maximum prices.
This position is in line with the messages sent previously by several European antitrust enforcers. For instance, the Latvian Competition Council warned against price cartels resulting in overpayment for consumers. The Greek Competition Authority has communicated that it would indulge vertical agreements tending to maintain prices at a low level (maximum or recommended prices), which otherwise could be deemed anticompetitive in certain circumstances; conversely, resale price management (minimum prices) would still be examined and prosecuted.
However, one may wonder whether antitrust (flexible or not) is the appropriate tool to tackle excessive pricing problems in the current context. Why? Because, it may not offer a timely remedy (as a prior investigation will still be needed); because, the concept of exploitative abuse to address excessive prices traditionally raises several complex legal questions, and even more if we are to speak about temporary dominance resulting from the current context.
One may therefore not exclude that, in the most critical situations, European Governments will prefer ex-ante regulation over ex-post regulation, like in France where the price of hydroalcoholic gel was eventually fixed by decree.
1 ECN is the network for coordination between the national competition authorities (NCAs) within the EU/EEA, the European Commission (DG Comp) and the EFTA Surveillance Authority.
The UK will no longer be a Member State of the European Union (the “EU”) as of 11 p.m. on 31 January 2020 (“Exit Day”). A ‘transition period’ will run from Exit Day until 11 p.m. on 31 December 2020 (the “Transition Period”).
The Competition and Markets Authority (“CMA”) has published a guidance document explaining how Brexit, or “EU Exit,” will affect its ‘powers and processes’ for competition law enforcement (antitrust, including cartels), merger control and consumer protection law enforcement during, towards the end of and after the Transition Period (the “Guidance”). The Guidance also explains how ‘live’ mergers and ‘live’ antitrust cases being reviewed by the European Commission (the “Commission”) or the CMA during and at the end of the Transition Period will be treated.
In this post, we provide an overview of the key takeaways in relation to merger control and antitrust.
The implications of EU Exit on merger control need to be considered during three different periods: (i) during the Transition Period; (ii) towards the end of the Transition Period; and (iii) after the end of the Transition Period.
- During the Transition Period: The ‘one-stop shop’ principle will continue to apply. When considering whether the merger control thresholds under the EU Merger Regulation (“EUMR”) are met, the turnover generated by an undertaking in the UK will still need to be included. The CMA will not open an investigation into a transaction unless jurisdiction has been transferred to it under the EUMR’s referral mechanisms. The UK courts and the Competition Appeal Tribunal will not have jurisdiction to review decisions of the Commission or the UK-related aspects of these decisions.
- Towards the end of the Transition Period: The Commission will retain jurisdiction over transactions that have been formally notified to it before the end of the Transition Period or if it has accepted referral requests under the EUMR (or the deadline for Member States to disagree to the request has expired (Article 4(5) of the EUMR)). If the Commission’s clearance decision in a particular case is subject to commitments, the Commission will continue to be responsible for monitoring and enforcing all aspects of these commitments, including any aspects relating to the UK, irrespective of whether the commitments have been agreed before the end of the Transition Period. However, the Commission and the CMA can agree to transfer responsibility for the monitoring and enforcement of the UK aspects of any commitments to the CMA.
- Following the end of Transition Period: The ‘one-stop shop’ principle will no longer apply. The turnover generated in the UK will no longer be relevant for determining whether the jurisdictional thresholds under the EUMR are met. Parallel investigations (i.e. investigations by the Commission and the CMA) can take place with regards to transactions that meet the thresholds under the EUMR and the Enterprise Act 2002. The Commission will continue to be able to investigate the effects in the UK of transactions over which it had already exercised jurisdiction (i.e. because the transaction had been notified during the Transition Period or referral requests were accepted).
As with merger control, the implications for antitrust enforcement should be considered during three different periods: (i) during the Transition Period; (ii) towards the end of the Transition Period; and (iii) after the end of the Transition Period.
- During the Transition Period: Articles 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”) will have full force and effect in the UK in addition to the domestic Chapter I and Chapter II prohibitions. Regulation 1/2003, the EU block exemption Regulations and EU guidance will also continue to be applicable. The Commission will continue to have the power to enforce and investigate suspected infringements of Articles 101 and 102 TFEU in relation to the UK. If the Commission has initiated an investigation into a suspected breach of either Article 101 or Article 102, the CMA and concurrent (sector) regulators in the UK will not be able to launch a parallel investigation. In the event that commitments have been accepted by the Commission before or during the Transition Period, the Commission will continue to have the responsibility for monitoring and enforcement of the UK-related aspects of these commitments. Infringements of EU law are relevant to the disqualification of directors for competition law infringements. This will continue to be the case during the Transition Period.
- Towards the end of the Transition Period: The Commission will retain jurisdiction over cases in relation to which it has formally initiated proceedings before the end of the Transition Period. However, the CMA and the concurrent regulators may be able to obtain jurisdiction over such cases. For instance, if the agreement or conduct under investigation affects trade within the UK and are ongoing at the end of the Transition Period, the CMA or concurrent regulators may investigate facts post-dating the Transition Period. Further guidance will be issued concerning the applicable procedure. If the CMA and the concurrent regulators are investigating conduct that may affect trade between EU Member States and have not issued a decision before the end of the Transition Period and the case is ongoing, Articles 101 and 102 TFEU will no longer be applied.
- Following the end of Transition Period: After the end of the Transition Period, the CMA and the concurrent regulators will only investigate suspected infringements of the Chapter I and Chapter II prohibitions. The Commission will continue to have responsibility for monitoring and enforcing the UK aspects of commitments given or remedies imposed; however, there is an option under the Withdrawal Agreement for this responsibility to be transferred to the CMA and concurrent regulators by ‘mutual agreement.’ Further guidance will be issued concerning the applicable procedure. It is expected that company director disqualification orders will also concern conduct found to have infringed Articles 101 and 102 TFEU during the Transition Period. The EU block exemption Regulations are ‘retained exemptions.’ As such, after the Transition Period, exemptions will operate as exemptions from domestic prohibitions. The Secretary of State, acting in consultation with the CMA, will have the power to vary or revoke the application of the retained exemptions. Businesses entering into agreements after the end of the Transition Period will be able to benefit from the retained exemptions provided they meet the relevant criteria.
The CMA considers the Guidance to be a ‘live’ document subject to change “in light of further political and legal developments.”
On June 26, 2019, the EU Commission opened a formal investigation into U.S. chipmaker Broadcom’s alleged abuse of dominance. In a rather unexpected move, the EU Commission informed the company, on the same day, of its intention to impose interim measures, a long-forgotten tool.
Broadcom, which is a major supplier of components for TV and modem chipsets, is being suspected of having put in place contractual restrictions to exclude its competitors from the market.
Hearings were held in late August.
On October 16, 2019, the EU Commission, likely unconvinced by Broadcom’s arguments, ordered Broadcom to unilaterally cease applying exclusivity clauses contained in its agreements with six manufacturers of TV set-top boxes and modems, withhold commercial advantages granted to some of its customers, and refrain from agreeing to the same provisions or like provisions for the time being.
The investigation on the merits is still ongoing.
Commenting on the October decision, Commissioner Vestager justified the recourse to interim measures, which had not been used for almost two decades, by saying that DG COMP had “strong indications” of Broadcom having engaged in exclusive or quasi-exclusive dealings with key customers and that “in the absence of intervention, Broadcom’s behavior [was] likely to create serious and irreversible harm to competition.”
In her official statement about the Broadcom case, Commissioner Vestager made it clear that it would not remain a one-off case and that she was “committed to making the best possible use of this important tool,” whose advantages (efficiency, quickness) seemed to have been “re-discovered” on this occasion.
So, why such a change?
Interim measures, a tool long neglected by the EU Commission
The EU Commission’s power to impose interim measures was first recognized by the EU judge in 1980 in the Camera Care case. In this case, the judge ruled that the EU Commission had the power “to take interim measures which are indispensable for the effective exercise of its functions and, in particular, for ensuring the effectiveness of any decisions requiring undertakings to bring to an end infringements which it has found to exist.”
The conditions to impose such interim measures were further clarified by subsequent caselaw.
Regulation 1/2003 later codified them as follows: “In cases of urgency due to the risk of serious and irreparable harm to competition, the Commission, acting on its own initiative may by decision, on the basis of a prima facie finding of infringement, order interim measures” (Article 8).
This codification, which could have been viewed as an opportunity to develop the use of this tool, has, instead, discouraged the EU Commission from doing so.
The conditions set forth in Article 8 of Regulation 1/2003 were indeed perceived as significantly harder to fulfill than the caselaw conditions until then applicable. The risk of a false positive (or Type 1 errors) was another reason for the EU Commission’s reluctance to use interim measures.
Thus, while decisions imposing such measures were already rare, there have simply been none since the entry into force of Regulation 1/2003.
The Commission is regularly asked to revisit its overly cautious approach to interim measures to no avail – until the Broadcom case.
Interim measures is a tool already used with some success by EU national competition authorities and is intended to be further developed at a national level
The EU Commission’s status quo contrasted with the dynamism of certain EU Member States’ competition authorities.
With an impressive track record of 27 cases of interim measures imposed between 2002 and 2019, the French Competition Authority (“FrCA”) has been by far one of the most active. While the greater use of interim measures by the FrCA may be explained by a lower burden of proof (condition of “likelihood of competition infringement” for the FrCA versus “prima facie finding of infringement” for the EU Commission; condition of “serious and immediate harm” construed broadly for the FrCA versus serious and irreparable damage to competition as a whole for the EU Commission), it is also the result of a greater interventionism.
The fact that certain national competition authorities, like the FrCA, have used interim measures for years, with some success (including in the high-tech industry), has necessarily inspired the EU Commission.
It may also well be that, with the upcoming implementation of the ECN+ Directive that requires all Member States to enable their competition authorities to resort to interim measures, the EU Commission felt increased pressure to lead by example.
Dusted off tools for new challenges
The development of fast-moving markets and the hot debate as to whether the traditional tools of antitrust law are sufficient to tackle the issues posed by some big tech companies also explain the timely resurgence of interim measures.
While, around the world, legislators, academics, practitioners and competition authorities themselves continue to devise the best possible answer(s), competition authorities must find solutions to address everyday concerns voiced by consumers, clients and competitors confronted with potentially unlawful conduct adopted by big tech companies.
Dusting off some tools from the existing toolbox clearly forms part of the solution. It has been the case with the notion of exploitative abuse, voluntarily left aside from the Commission’s enforcement priorities back in 2009, and now revived.
It may now be the case with interim measures.
The EU Commission’s change of approach to interim measures is good news: certain circumstances do require prompt action to preserve competition on the markets and avoid irreversible harm to consumers, something which can only be achieved by interim measures given the long duration of the investigation on the merits.
This renewed interest for interim measures should not however make the EU Commission forget too quickly what it has long feared, namely Type 1 errors. Interim measures are prone to these errors which are very costly for the companies concerned and the economy in general. They can discourage companies from innovating and have the power to adversely affect public opinion for years to the detriment of the investigated companies even if the companies are cleared at the end of the day.
We can, of course, count on companies facing such measures to remind the EU Commission of these limits, as necessary.
In any event, to know whether this tool has definitively found its place in the EU Commission’s arsenal, one will have to wait for the EU judge’s reaction either in the Broadcom case, if Broadcom appeals the October decision (which seems highly likely), or in the following case of appeal against interim measures. If the EU Judge sets the bar too high in terms of the standard of proof required from the EU Commission, it will probably consign interim measures to oblivion. If the EU Judge is less demanding, it will open a rift that the EU Commission is sure to rush into.
Back in 2013, Scor SE (“Scor”), whose subsidiary is engaged on the French market for the reinsurance of risks relating to natural disasters, lodged a complaint with the European Commission alleging unlawful and incompatible State aid in favor of Caisse Centrale de Réassurance (“CCR”). CCR is a public undertaking of reinsurance whose core activity concerns the reinsurance of risks relating to natural disasters in France and benefits from an unlimited State guarantee to the extent certain of its activities are concerned.
Unlimited public guarantees granted to undertakings are generally incompatible with EU State aid law. As the European Commission pointed out in its Guarantee Notice, “guarantees must be linked to a specific financial transaction, for a fixed maximum amount and limited in time. In this connection the Commission considers in principle that unlimited guarantees are incompatible with Article  of the Treaty.”
Departing from the aforementioned Notice and its decisional practice, the Commission, after having reviewed the measure in Phase I, dismissed Scor’s complaint and declared compatible, in decision C(2016) 5995 final of September 26, 2016 (the “Decision”), the unlimited guarantee in favor of CCR. The Commission considered that this guarantee was essential for the French regime for indemnification of natural disasters and pursued an objective of national solidarity in the face of risks related to natural disasters, and that it was necessary and proportionate in light of this objective and of limited disturbance on competition and interstate trade.
On May 6, 2019 the General Court of the European Union (“General Court”) dismissed the action in annulment that Scor introduced against the Decision (case T‑135/17 or the “Scor Court case”).
2. Interesting features of the Scor Court case:
It is not really its contribution on State aid substantive issues that makes this case interesting; it is rather that it reminds us of the difficulties facing companies willing to challenge the merits of a State aid decision that benefits a competitor (in this case, a compatibility decision to the benefit of CCR).
● Legal standing to challenge a State aid compatibility decision on the merits
Referring to the landmark Plaumann case (Case 25-62), the General Court recalled that for Scor (as a non-beneficiary third party) to have standing to challenge the Decision on the merits, it had to demonstrate that it was “individually concerned,” i.e. affected by the disputed decision by reason of certain attributes peculiar to it or by reason of circumstances that differentiate it from all other persons and, by virtue of these factors, distinguish it individually just as in the case of the addressee.
To pass this test, the General Court traditionally considers that it is not enough for the applicant to be a competitor. The applicant must demonstrate that the disputed decision substantially affected its position on the market.
Hence the difficulty lies in what “substantially affected” shall mean.
We know from precedents, and this is emphasized once again by the Scor Court case, that the mere fact that a measure may exercise an influence on the competitive relationships existing on the relevant market and that the undertaking concerned was in a competitive relationship with the recipient does not suffice.
Rather, the criterion of substantial affectation of the applicant’s market position requires to be demonstrated by specific circumstances, such as: significant decline in turnover, appreciable financial losses or a significant reduction in market share following the grant of the aid in question, loss of an opportunity to make a profit or a less favorable development than would have been the case without such aid.
Hence it is easy to understand why this criterion can constitute a serious obstacle for competitors willing to challenge a State aid decision on the merits. It is even more true when one considers that, in the finding of State aid, the Commission generally does not devote too much effort to the demonstration of the affectation of competition resulting from the aid. One may regret this, as it would be very helpful (let alone for the concept of State aid) to find more developments in that regard.
In the case at hand, the General Court, following a two-step analysis, first identified the market concerned by the dispute (i.e. the French market for the reassurance of risks caused by natural disasters). It then went on to examine the circumstances put forward by Scor to demonstrate legal standing, namely: its subsidiary’s modest size on the market concerned (i.e. 0.08-0.11% – figures criticized by the Court for not being contemporaneous to Scor’s application) compared with its position on other French reinsurance markets (around 8-13%), as well as its complainant status and active role in the course of the proceedings. Regarding the first circumstance, the General Court took the view that Scor had failed to provide evidence of a potential link between the State guarantee to CCR and the particularly low level of Scor’s subsidiary’s market share on the French market for the reassurance of risks caused by natural disasters. As for the second circumstance, the complainant status and the active role played in the proceedings was recognized as a circumstance to account for, but it was said to be insufficient in itself to prove legal standing. The General Court consequently rejected, as inadmissible, Scor’s pleas challenging the merits of the Decision.
However, it declared admissible Scor’s pleas pertaining to the protection of its procedural rights, applying here again a well-established case-law according to which any “interested party” may claim protection of its procedural rights before the EU judge in relation to a decision not to raise objections or a non-aid decision.
● Types of arguments left for competitors to challenge a State aid compatibility decision as illustrated by the Scor Court case
Competitors are easily deemed to be “interested parties,” i.e. “any person, undertaking or association of undertakings whose interests might be affected by the granting of aid …” (Article 1 of Regulation 2015/1589). But, then, as recalled by the General Court, the scope of their pleas is much more limited than if they were Plaumann-applicants, as they can only claim violation of procedural rights.
Applying this principle in the Scor Court case, the Court hence accepted to examine Scor’s pleas only on the failure to state reasons (an issue of public policy that EU courts must raise on their own motion), and on the violation of its procedural rights.
In that regard, Scor alleged that there were serious doubts as to the compatibility of the Decision, which should have led the Commission to open formal proceedings (phase II), i.e. long duration of the administrative proceedings; Commission’s hesitation on the legal basis for the Decision; the fact that a potential alternative system was envisaged; indications in the content of the Decision demonstrating serious doubts: failure to state reasons, insufficient and incomplete investigation, greater focus on the compatibility than on the existence of aid, no review of Scor’s proposal for alternative systems, misunderstanding by the Commission of the functioning of the guarantee, various circumstances raising doubts about the proportionality of the aid).
But, after addressing each of them in turn, the General Court eventually rejected all these arguments.
If, to some extent, procedural arguments may have a connection with the merits (in particular, the Court may examine substantive arguments to the extent they tend to support a procedural plea), it goes without saying that they are rather weak weapons and cannot compensate for the inadmissibility of substantive pleas. This can understandably leave the competitor-applicants frustrated when they do not manage to successfully pass the Plaumann test.
Furthermore, even in cases where pleas on the violation of procedural rights succeed, this does not necessarily mean that the measure at stake would ultimately be declared incompatible aid, as the Commission may comply with the requirements set out in a judgment without having to declare the measure incompatible.
At a time of increasing calls for enhanced private enforcement in the State aid space and when it is duly acknowledged that “State aid (…) directly harm[s] the interests of other players in the markets concerned, who do not benefit from the same type of support” (emphasis added) (see the 2019 Recovery notice), one may wonder whether it should not be necessary to revisit traditional principles about legal standing of competitors when it comes to challenging the merits of compatibility or non-aid decisions.
 Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (2008/C 155/02).
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.
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.
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.
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, 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.
 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.