Digital and Pharma Merger Cases Raise Worry of Enforcement Gap in EU Merger Control
Financial Conduct Authority Probes Competition in the Mortgage Sector
Italian Competition Authority Probes Major Insurers for Anticompetitive Public Statements
The French Competition Authority Speaks for the Hard of Hearing
The Italian Competition Authority Opens In-depth Investigation into the Agricultural Insurance
German Banks' Mobile Payment System Unconditionally Approved
French Supreme Court (Re-)Endorses E-commerce Discounting
Digital and Pharma Merger Cases Raise Worry of Enforcement Gap in EU Merger Control
Introduction
On 7 October 2016, the EU Commission launched a public consultation ("the Consultation") on the functioning of certain procedural and jurisdictional aspects of EU merger control as set out in Council Regulation No. 139/2004 ("the EU Merger Regulation").
The EU Merger Regulation is one of the main instruments of EU competition law and it grants the EU Commission exclusive competence to vet certain large scale mergers defined by a number of turnover-based jurisdictional thresholds. Its principal objective is to ensure that competition in the internal market is not distorted or restricted by companies engaging in mergers or "concentrations" (as they are referred to in the EU merger regulation).
The Consultation builds on the feedback received from the EU Commission's White Paper of 2014 entitled "Towards More Effective EU Merger Control" (COM (2014) 449 Final) ("2014 White Paper") but also highlights recent worries that the acquisition of certain fledgling technology and pharmaceutical companies with significant potential may be escaping appropriate EU merger control scrutiny.
The EU Commission has invited comments from businesses, trade associations and public authorities, which closed recently, on the 13th of January 2017.
Background
The EU Merger Regulation, which was originally adopted in 1989 and came into force in the year 1990, has been the subject of regular reviews (notably those in 2003 and from 2013 onwards) to assess its functioning and identify possible areas for refinement, improvement and simplification of its provisions.
In the 2014 White Paper the EU Commission put forward a cocktail of highly controversial reforms, namely the proposed regulation of minority non-controlling shareholdings and on the other highly technical and procedural refinements such the simplification of the notification process for certain categories of merger that normally do not raise competition concerns.
Following the results of the feedback on the 2104 White Paper the introduction of controversial proposals to review minority non-controlling shareholdings were shelved (at least for the time being) but they considered that proposals to take certain transactions that are not a threat to competition outside the Commission's merger scrutiny should be taken forward.
Generally however it concluded that the EU merger control system worked well and that no fundamental overall of the system was needed.
However, following on from the above, recent experience in enforcing the EU merger control rules showed that the effectiveness of current solely turnover- based jurisdictional thresholds should also be a subject of further consultation.
The Consultation
The Consultation principally covers the following areas.
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Review of turnover thresholds: whether it is appropriate to amend the solely turnover based jurisdictional threshold to catch highly valued acquirers of target companies principally in the digital and pharma sectors that have not yet generated substantial turnover and are at the moment slipping EU merger scrutiny.
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Simplification of the merger control process: whether certain categories of cases that do not generally raise competition concerns can be removed altogether from the EU merger control net.
In addition the Consultation covers a number of other more detailed technical and procedural reforms primarily relating to the referral of cases between the EU Commission and the Member States and the other workings of the EU Merger Regulation. In the interests of space, these more technical proposals are not covered in this article.
Review of turnover thresholds
Currently the EU merger control regime only applies if the turnover based jurisdictional thresholds apply as set out in Article 1 of the EU Merger Regulation. However, a debate has emerged on the effectiveness of these turnover-based jurisdictional thresholds. The issues turn on whether these thresholds allow the capture of all transactions which could potentially have an impact on competition in the internal market.
Recent experience under the EU Merger Regulation has shown that transactions in certain crucial sectors of the economy could be slipping the net. The sector most affected is the digital economy where new services/product offerings are able to build up a significant user base before the business concerned is able to earn a substantial turnover. Businesses such as these can have a significant impact on the relevant market’s competitive landscape.
Certain tech business models may also involve collecting and analysing large amounts of data. The initial gathering phase does not generate, in most cases, significant turnover. Data gatherers can also have a similar marked effect on competition within their sector.
Therefore the EU Commission has concluded that players in the digital economy may have considerable actual or potential market impact. This impact is usually reflected in high acquisition values despite the fact that little or no turnover has been generated.
Acquisitions of such companies with no substantial turnover are unlikely to be captured under the current turnover-based thresholds under the EU Merger Regulation. This is despite the fact that the acquired company may already play a competitive role, hold commercially valuable data and/or have considerable market potential for the future.
As part of the Consultation the Commission is seeking views as to whether it should complement the existing turnover based jurisdictional thresholds of the EU Merger Regulation with additional notification requirements based on additional criteria such the transaction value.
But it is not just in the digital economy where an enforcement gap may exist. Other sectors also bear consideration such as the pharmaceutical industry. The EU Commission cites a number of instances where major pharmaceutical companies have entered into high value acquisitions of small bio-tech companies which predominantly concentrate their activities on researching and developing new treatments which may have significant impact on the market but do not yet generate substantial turnover.
Simplification Process
In December 2013 the Commission adopted a package of measures ("the Simplification Process") aimed at simplifying merger control procedures to the greatest possible extent without having to resort to amending the provisions of the EU Merger Regulation itself.
The simplified procedure allows companies to submit less market share and other information than the full merger notification needed under the EU Merger Regulation which helps reduce the burden on business.
The Simplification Package resulted in a widening of the scope of the application of the simplified procedure for non-problematic cases as well as streamlining and simplifying the forms for notifying mergers to the Commission. Since that package entered into force on 1 January 2014, the number of cases dealt with under the simplified procedure has increased between January 2014 – September 2016 to around 69%.
The Commission Notice on the Simplified Procedure ("the Notice") applies to each of the following categories of concentration):
(i)Non-EEA Joint Ventures: These are transactions where two or more undertakings acquire joint control of a joint venture provided that the joint venture has no or negligible actual or foreseen activities in the EEA where the turnover of the contributed assets is less than €100 million in the EEA and the total value of the assets transferred to the joint venture is less than €100 million at the time of notification.
(ii)No Overlapping Activities: These cases are where two or more undertakings merge or where one or more undertakings acquire sole or joint control of another undertaking provided that none of the parties to the concentration are engaged in business activities in the same product and geographic market or in a product market which is upstream or downstream from the product market in which any other party to the concentration is engaged.
(iii) Overlapping Activities below Certain Market Share Thresholds: Transactions where two or more undertakings merge and the combined market share of all the parties to the transaction is in the context of horizontal relationships is less than 20% or in the case of vertical relationships 30%.
(iv)Acquiring Sole Control: Transactions where a party is to acquire sole control of an undertaking over which it already has joint control; and
(v) Low Concentration: Transactions where two or more undertakings merge and both of the following conditions are fulfilled:(a) the combined horizontal market share of all parties concerned is less than 50%; and (b) the increment of the HHI index resulting from the transaction is below 150.
The EU Commission under the Consultation is now seeking views as to whether any or all of the above transactions currently subject to the simplified procedure such as the creation of non- EEA joint ventures should be excluded from the scope of the EU Commission’s merger review altogether. This would require amendments to the EU Merger Regulation. The Commission hopes that by making the procedure simpler it could further cut costs and reduce the administrative burden on businesses.
Conclusion
The EU Commission's current initiative to cut the costs of notifications and reduce the administrative burden on businesses in non-problematic cases is to be widely welcomed as are making other procedural aspects of the EU Merger Regulation process more efficient.
The unknown quantity in this Consultation will be the third parties’ reaction to the extension of the EU Commission's jurisdiction to transactions of high value. Whilst the high level case for those extra controls is argued well in the Consultation paper, the way, and crucially, the level at which they are introduced is important because it could impose more, not less, administrative burden and cost.
This article first appeared in Governance + Compliance Magazine.
Financial Conduct Authority Probes Competition in the Mortgage Sector
On 12 December 2016, the Financial Conduct Authority (the "FCA") launched a market study into the residential mortgage market to ascertain whether competition in that market is working as well as it could and to identify possible measures to improve competition to the benefit of consumers.
The market study is being conducted pursuant to the FCA's regulatory powers under the Financial Services & Markets Act 2000 ("FSMA").
The launch of the market study follows the FCA's Call for Inputs in 2015 seeking stakeholders’ views on the ways in which competition and benefits for consumers in the mortgage sector could be enhanced. In Spring 2016, the FCA published a summary of what had emerged from the Call for Inputs and announced its intention to open a market study into competition in this sector. Following this announcement, the FCA officially launched its market study and its terms of reference in December 2016.
According to the terms of reference the market study will focus on consumers' ability to make effective choices and the tools available (including advice) to make those choices. The market study will also analyse if the commercial arrangement between lenders, brokers and other players lead to conflicts of interest or created a lack of incentives to the detriment of consumers. The FCA states that it wishes to ensure that there are opportunities for better technological solutions to solve the issues it flags up in the market study including a greater use of digital channels to give information or advice.
The market study will focus on first charge residential mortgages which includes new mortgages, remortgages, internal switching as well as further advance and equity release. The study will cover the activities of firms (including estate agents, developers and generally any firms that aids consumers to make decisions) and consumers across the consumer journey. It will not cover commercial mortgages or second charge commercial mortgages.
Two principal questions the market study will examine are as follows:
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at each stage of the mortgage process, do the available tools (advice, price comparison websites, online calculations) exist to help consumers make effective decisions?
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do commercial agreements between lenders, brokers and other players lead to conflicts of interest or produce a lack of incentives or compete effectively to the detriment of consumers?
The study will also include a review of the mortgage process , including an analysis of whether the current framework favours certain distribution or business models.
Mortgage lenders will need to provide relevant information regarding their arrangements with intermediaries and as such should review these arrangements carefully to ensure the compliance with competition law and the current regulation.
An interim report should be available in summer 2017, setting out the FCA's analysis and preliminary conclusions. This will provide stakeholders with an opportunity to comment prior to publishing the final report in early 2018.
If the FCA identifies concerns following the conclusion of the market study it can take a range of actions under its regulatory powers under FSMA to help promote more effective competition. These include amending regulatory rules, introducing firm-specific remedies or enforcement action, publishing general guidance or proposing enhanced industry self-regulation. In addition if they found existing rules acted as barriers at entry or innovation they could propose removing or amending existing rules.
The FCA could using its powers as a concurrent competition regulator refer one or more issues to the Competition and Markets Authority for further investigation as a market investigation reference.
Italian Competition Authority Probes Major Insurers for Anticompetitive Public Statement
On 15 December 2016, the Italian Competition Authority (the "ICA") launched an in-depth investigation against twelve leading Italian insurance companies including the Unipol Group. The officers of those two groups released public statements to the insurance market, on the elimination of the competitive dynamics in the price of the civil liability insurance market services and their respective pricing strategies related to their expected insurance premium increases.
The ICA found that such statements may be considered anticompetitive as it eliminates the uncertainty on the future price strategies and supports the expectation that any increases, being generalised among the major players, do not follow the risk of losing customers which could result in an illegal restrictive agreement between the major players on a possible end of the "price war". The ICA considered that these public market statements breached competition law rules as it forecasted the elimination of competition on both motor insurance costs and the relevant pricing strategies. Therefore, the ICA alleged that the conduct of the two mentioned groups of companies would be considered as an anticompetitive agreement in breach of Article 101 of the Treaty on the Functioning of the European Union (the "TFEU").
However, the alleged breach has yet to be proven at this stage and the investigation continues.
The French Competition Authority Speaks for the Hard of Hearing
Suspecting the high price of hearing aid devices to be the cause of a low rate of ownership in France, the French Competition Authority (the "FCA") conducted last year a broad market survey and public consultation to define any competition-related issues. See https://www.bryancave.com/fr/thought-leadership/eu-competition-law-update.html#hearing.
In light of its investigation, the FCA has identified two main competition issues. First, the FCA considered that the frequent linking of sales of hearing aids with related services prevents patients from freely choosing between the various offers, and as such, obliges them to pay immediately for services (e.g., fitting, follow-up and inspection) which will be provided only over several years. Second, the FCA identified another issue related to the limited number of hearing aid specialists, who are license- based on a national quota which impedes the supply of services and restricts the hiring of qualified personnel by new market players.
On 14 December 2016, the FCA published its official recommendations aimed at ensuring quality of care and customer satisfaction.
First, in order to stop the “entrance fee” observed, the FCA recommended separating the initial purchase of the hearing aid (including device and initial fitting and services during the first year) from the purchase of subsequent follow-up services provided in subsequent years. This separation should enable patients to better compare the different services required for their needs.
On this point, however, certain professionals had expressed the view that separate services would lead to health risks due to non-use or improper use of hearing aids or the lack of regular inspections. Nevertheless, the main health risk was characterized by the FCA as the paucity of hearing aid sales particularly in light of the finding that millions of patients currently lack a needed hearing device. Moreover, the FCA considered that the risk of improper use may be resolved through public information campaigns and systematic reminders aimed at educating patients as to proper use of the hearing aid and an appropriate follow-up. Finally, the FCA noted that introducing a system of medical records could be useful to enhance and ensure a better patient follow-up care, and in particular for patients moving to a different area or even for those who change their hearing aid specialist.
Second, the FCA also recommended to remove or increase the quotas used to determine the number of hearing aid specialists trained each year in order to allow the new entrants to expand their networks across France. This stimulation of competition should also facilitate access to hearing aids for patients due to a decrease in prices resulting from the additional supply.
The Italian Competition Authority Opens In-depth Investigation into the Agricultural Insurance Sector for Abuse of Dominance
On 19 October 2016, the Italian Competition Authority (the "ICA") opened an in-depth investigation against the Italian Consortium named Consorzio di difesa della produzione agricola di Trento, ("CODIPRA"), which promotes initiatives aimed to protect Italian agricultural businesses from the damages caused by adverse weather conditions.
In particular, the ICA stated that CODIPRA, which enjoys a dominant position on the market of the brokerage of State contributions, would use this almost monopolistic power to exclude its only competitor Coop Di Italia ("Coop"), an Italian cooperative enterprise from the market.
The ICA found that CODIPRA would be boycotting Coop's brokerage activities, by applying discounts to the clients interested in Coop’s commercial proposals which were, de facto not replicable by the mentioned competitor.
The ICA alleged that the conduct of CODIPRA would amount to an abuse of dominance in breach of Article 102 of the Treaty on the Functioning of the European Union (the "TFEU").
The alleged breach has yet to be proven at this stage and the investigation continues. However, the ICA has opined that such conduct, if proven, would amount to an infringement of Article 102 of the TFEU on the grounds that: (i) it would adversely affect trade within the EU; and (ii) CODIPRA has achieved a dominant position on the relevant market thanks to favorable law provisions.
German Banks' Mobile Payment System Unconditionally Approved
On 25 November 2016, the (the “FCO”) announced that it raised no objection to the new payment function known as "Kwitt," with which savings bank customers can send money from one mobile phone to another. Since there were concerns that the project, which was founded by otherwise independent savings banks, could lead to the limitation of competition, the FCO felt duty bound to investigate the function under its competition powers.
The new system works as the German joint banking computing centres’ agreed to implement the function into the savings banks' mobile applications, allowing the participating banks and their customers to make mobile-to-mobile payments within their circle of contacts. The savings banks announced that their apps will be equipped with this new function after a short update. Provided that every savings bank uses this function, around 4.5 million app users could send money to other mobile devices.
It will also be possible to reach payment recipients outside of the savings bank group; however, this procedure would be more complex. In contrast, the request for payment will only be possible among customers, who are respectively registered with Kwitt.
With the new Kwitt function, the savings banks come into competition with third party payment vendors, who (independent of any affiliation to a banking group) are offering similar applications on the market and licenses to financial institutions. Adding to the convenience for consumers, savings banks that want to offer their customers this payment method receive the product from their computing centers and do not have to develop it themselves or purchase it from third-party vendors. The FCO assumes that most savings banks will make this function available to their customers.
Even though the Kwitt function clearly involved a level of horizontal co-ordination between the savings banks, and provided a coordinated product on the market to the detriment of independent third party application providers, the FCO did not have any competition concerns regarding this project. This was because (as stated by the FCO in its press announcement) "any such restriction is outweighed by considerable efficiencies because with this easy form of money transfer the individual savings bank customer is not limited to transferring money only to customers of his or her own bank."
Meanwhile, there have been plans between the savings and cooperative banks to introduce a joint payment function under the name of "cash carrier". Due to the inter-bank cooperation, questions regarding competition must be continually raised since the cooperation partners would have privileged access to a considerable portion of the customer basis in Germany. The FCO has not made a final decision on this matter since the project has not been continually pursued.
French Supreme Court (Re-)Endorses E-commerce Discounting
On 8 November 2016 the French Supreme Court (Cour de Cassation) overturned the decision of the Paris Court of Appeal of 21 January 2015, which had found that extremely low prices practiced by an internet site constituted unfair competition.
In the considered case, JPL Café Coton ("Café Coton"), a French textile company selling through a French and international exclusive and selective distribution network, sued BLT Développement ("BLT"), the operator of a merchant website owned by the family of controversial businessman Bernard Tapie, for having marketed Café Coton’s products at very low prices and without having entered into a selective distribution agreement with Café Coton. According to Café Coton, this represented a violation of the terms of the network agreements prohibiting out-of-network sales for resale and depreciated the image of its brand.
BLT argued that it acquired the goods in question from an Italian company which had itself acquired them from the Italian subsidiary of Café Coton, neither of which companies had entered into a selective distribution agreement with Café Coton. Therefore, BLT claimed that it did not participate in the violation of any ban on resale outside the Café Coton network, and that in consequence it was free to resell the Café Coton products at prices it deemed fit.
In its ruling, the Paris Court of Appeal had found that BLT did not violate or harm the Café Coton network, but nonetheless held BLT liable for unfair competition by marketing Café Coton's products at prices which were excessively low, i.e., from 17% to 37% lower than those generally practiced by Café Coton distributors. These low pricing practices were deemed, ipso facto, by the Court of Appeal to constitute unfair competition by taking advantage of Café Coton’s reputation and causing a diversion of customers and damaging the brand’s image. The Court of Appeal thus held BLT liable for €50,000 of moral damages in this regard.
In overturning the Court of Appeal decision, the Cour de Cassation ruled that because BLT’s supply was not unlawful, the resale of the products at low prices did not, without more, either constitute a fault, harm the network or depreciate the products' image. The case has been remanded to other judges at the Paris Court of Appeal.
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