European Union

After Almost Two Decades the EU Commission Finally Revived Interim Measures

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 versusprima 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.

Conclusion

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.

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

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).

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

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

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

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

The New Regulation

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

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

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

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

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

Transactions Subject to Review

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

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

 

Procedure

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

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

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

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

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

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

Substantive Assessment

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

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