European Commission

‘Competitors’ Challenges to the Merits of a State Aid Decision is a Tough Nut to Crack, the Scor (Court) Case Reminds Us’

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1. Background:

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,[1] “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 [107] 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.

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[1] 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).

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

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

Softening the pharmacies and pharmacists’ monopoly over drug distribution

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

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

Softening the regime applicable to advertising issued by pharmacists

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

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

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

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

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

Softening the rules applicable to online drug distribution

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

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

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

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

Other issues addressed

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

Conclusion

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

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

 

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

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

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

They were not quite right.

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

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

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

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

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

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

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

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

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

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

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

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

Antitrust enforcement

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

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

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

Merger control

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

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

What’s next?

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

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

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

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

E-Commerce: The EU Commission Releases Its Preliminary Report in the E-Commerce Sector Inquiry

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After gathering information from nearly 1800 stakeholders from all 28 EU Member States and collecting around 8000 distribution agreements, the EU Commission published on 15 September a preliminary report on the findings of its ongoing competition sector inquiry into e-commerce.[1]

The inquiry was launched by the Commission in May 2015, after finding that despite the growing significance for e-commerce across EU countries over the last years (approximately 50% of the population of the Union shopped online in 2014), cross-border online trade remained limited.

While such limitations may have been attributable to language barriers, consumer preferences or differences in legal frameworks between Member States, the Commission sought to investigate the sector based on indications that companies active on the e-commerce market may be engaged in anticompetitive agreements.

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Price Signalling Can Put Companies in Hot Water in the EU

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The long list of practices violating EU competition law just got longer: in Container Shipping, the European Commission confirmed that the unilateral publishing of pricing information, in public media, can violate Article 101 TFEU.[1]

In this case, the Commission expressed concern that the practice of fourteen container liner shipping companies (“Carriers”) to publish intentions to increase prices may harm competition. The Carriers regularly announced intended increases of freight prices on their websites, via the press, or in other ways. The announcements were made several times a year and included the level of increase and the date of implementation. The Carriers were not bound by the announced increases and some of them postponed or modified the price increases after announcement.

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European Commission Puts the Boot into Spanish Football Clubs

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On 4 July 2016, just as European football takes centre stage at the final stages of the UEFA European Championships in France, the European Commission (“Commission”) issued a decision ordering Spain to recoup tens of millions of euros of unlawful State aid granted to seven Spanish football clubs, including two of the best-known clubs in the world, Real Madrid and FC Barcelona.

The Commission’s probe was launched in December 2013, with three parallel investigations into certain public support measures granted to Real Madrid, FC Barcelona, Athletic Club Bilbao, Club Atlético Osasuna, and three Valencian football clubs, Valencia CF, Elche CF and Hercules CF.

“Protect the level playing field”

In announcing the rulings, Margrethe Vestager, Competition Commissioner, stated: “Using tax payers’ money to finance professional football clubs can create unfair competition. Professional football is a commercial activity with significant money involved and public money must comply with fair competition rules. The subsidies we investigated in these cases did not.” The Commission’s press release cites its application of State aid rules in these investigations as “protect[ing] the level playing field” for competing professional football clubs against State measures that could “prevent rivals from growing and being competitive.”

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The European Commission’s Priorities in Pursuing Enforcement Actions

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Businesses often wonder how competition authorities pick and choose the cases they decide to bring.  Companies with operations in Europe now have some guidance as a result of a recent speech by European Competition Commissioner Margrethe Vestager, in which she outlined how the Commission prioritizes its enforcement efforts.

Commissioner Vestager explained that the Commission uses three main criteria in prioritizing which cases to pursue.  Not every case needs to satisfy all three criteria, but the Commission tries to keep these three objectives in mind in determining whether to pursue an enforcement action.

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