Competition/antitrust law

by Dentons

Focus on the US

Cartel enforcement activity and stiffer criminal penalties against price fixing

The Department of Justice (DOJ) continues to investigate and seek criminal charges against worldwide cartels. This enforcement activity will remain at heightened levels and continue to be a huge moneymaker for the DOJ. Fiscal 2014 and fiscal 2015 saw billions of dollars in criminal fines paid by companies in a wide variety of industries. In 2015, the DOJ continued its focus on auto parts manufacturers and on enforcing criminal antitrust laws in the tech industry, including electrolytic capacitors and an e-commerce executive for allegedly using algorithm-based software to fix prices. The DOJ continues to prosecute individual wrongdoers, charging 66 individuals in 2015, up from 44 in 2014, while the average prison sentence of 24 months in 2010-2015 has increased by a factor of three since the 1990s. Individual prosecutions will continue in 2016, consistent with the so-called “Yates Memorandum”, the September memorandum from Deputy Attorney General Sally Yates that details DOJ policy to target individual wrongdoers involved in corporate misconduct, underscoring the importance of effective compliance programs.

Merger investigations and suits to block certain combinations will continue in 2016

Bolstered by litigation wins in 2015, the DOJ and Federal Trade Commission (FTC) will continue to focus on mergers and bring enforcement actions based on narrow market definitions. DOJ investigations resulted in parties abandoning major acquisitions, including Comcast/Time Warner Cable, Applied Materials/Tokyo Electron, GE/Electrolux, and Bumble Bee/Chicken of the Sea, after incurring huge expenses and paying large break-up fees. The FTC successfully enjoined the proposed Sysco/US Foods combination after an eight-day hearing with the court agreeing with the FTC’s narrow market definition and rejecting the parties’ argument that the FTC’s market was based on an unrepresentative sample of subjective customer preferences. Similarly, the FTC is presently seeking to block the Staples-Office Depot merger on the same basis. In addition, the health care-related sector has also been under scrutiny. The FTC is and will continue to be active in seeking to block health care combinations. The FTC filed three suits near the end of 2015, all of which are anticipated to be resolved in 2016. For its part, the DOJ will also decide whether to allow several huge health insurance company mergers in 2016.

Pharmaceutical pricing under scrutiny

Pharmaceutical pricing will be under heavy fire in 2016, with investigations by both the DOJ and FTC. While unilateral pricing behavior is not usually subject to antitrust attack, the agencies will look hard for a remedy here. The DOJ continues to expand its ongoing probes of generic drug pricing, with subpoenas seeking information from seven pharmaceutical companies. Both the House of Representatives and the Senate are focused on drug pricing, with the Senate Select Committee on Aging holding a hearing and sending inquiries to a number of drug companies. In November, Democrats launched an Affordable Drug Pricing Task Force and sought hearings on Turing and Valeant. In addition, the Connecticut and New York attorneys general, and the US Department of Health and Human Services are conducting investigations while the FTC, state attorneys general, and private plaintiffs continue to aggressively litigate pharmaceutical companies’ conduct at the expiration of patent life.

Challenges to “reverse payments” have proliferated in the wake of the US Supreme Court’s FTC v. Actavis decision. In King Drug v. Smithkline Beecham, the Third Circuit court held that antitrust challenges can reach more than cash payments, including other forms of consideration, likely encouraging even more government and private suits. The FTC has also demonstrated an increased proclivity to seek significant monetary relief in reverse payments cases; its long-standing suit against Cephalon Inc. was US$1.2 billion. So-called “product hopping” was the subject of its first appellate decision in New York v. Actavis, in which the court upheld an injunction requiring Actavis to continue to make available an older drug until generic entry, after introducing a new version of the drug, to facilitate generic competition. At the same time, a lower court decision which took a dimmer view of antitrust challenges to product hopping in Mylan v. Warner-Chilcott is on appeal before a circuit court and will likely be decided in 2016. If the lower court decision is upheld, the circuit split could be ripe for Supreme Court review.

FTC report on patent assertion entities

The FTC has been studying patent assertion entities, which are “firms with a business model based primarily on buying patents and then attempting to generate revenue by asserting them against businesses that are already practicing the patented technologies.” The FTC issued requests for information from 25 such entities across various industries, and 15 non-practicing entities and firms in the wireless chipset sector. The FTC is specifically targeting the wireless industry because of the intensity of patent assertion claims in that sector. The FTC’s report, expected in early 2016, may influence court decisions and legislation involving these firms.

Focus on Europe

EU competition authorities focus on internet platforms

Competition authorities are looking at “platforms”—a ubiquitous feature of the “sharing economy”—from a variety of angles. New services, such as Uber, Air B&B and Just Eat, which do not make sales by themselves but instead pair up buyers and sellers, are examples. Platforms such as Uber have been undercutting traditionally highly regulated markets such as metropolitan metered taxis. Is this fair competition, or the sidestepping of important employee, consumer and public protections?

In 2015, the UK’s Competition and Markets Authority spoke up in favor of Uber and against Transport for London’s proposed restrictions on such services. More such interventions are possible. However, despite looking similar on the outside, platforms tend to offer a slightly different service in different cities (for example, Uber only connects licensed minicab drivers in London, which has not been the case elsewhere), and regulatory responses vary from place to place for each platform. Across the EU, Uber is opening in some cities and closing in others (e.g., the German cities of Hamburg, Frankfurt and Düsseldorf), as the different regulatory environments affect its model in different ways.

The ultimate platform provider is Google. Its primary function as a search engine (a market in which it holds higher market shares in the EU than in its native US), coupled with its use of sponsored and non-sponsored links (including links to its own services), make it a key facilitator between buyers and sellers. As a result, its behaviour has caught the eye of the European Commission, which has subjected it to two investigations for potential abuses of dominance: one into Google shopping and the other into the Android mobile phone operating system. The Commission has also said that it will look at Google’s maps and travel services in future.

Each of the European Commission’s investigations into Google has been subject to criticism. The Commission has previously tried and failed to settle its investigation into Google shopping in 2014, which followed objections from competitors and politicians alike. In December 2015, a European Parliamentary committee recommended that the Commission both speed up and widen the scope of its investigations into Android. The Commission may reach a decision on one of these investigations at least at some point this year (albeit one that is highly likely to be appealed).

Rogue nation: EU National Competition Authorities and inconsistent enforcement actions taken against most favored nation clauses

Vertical restrictions are an area where the EU competition rules have historically been stricter than in other jurisdictions. Restrictions on distributors’ abilities to set independent prices are treated in the EU as being equivalent to cartel arrangements and are not subject to a “rule of reason” test, as is the case in the US.

It is in this environment that the most favored nation (MFN) clauses in agreements between online travel agent (OTA) and hotels came under scrutiny by several competition authorities across the EU. While normally a pan-EU case would be handled by the European Commission, this case was handled by the National Competition Authorities (NCAs) of France, Italy and Sweden, who were appointed by the European Competition Network (an association of EU NCAs and the Commission), to lead the investigations. There was an understanding that other NCAs—each of which enforces domestic and EU competition law in its own territory—would not duplicate this work, but that they would be kept informed and contribute to the process.

MFNs can be broadly described as falling into two camps: broad MFNs and narrow MFNs. Broad MFNs require the hotel to give the OTA the same or better room rates, conditions and availability as on any other channel, including those of competitor OTAs. Narrow MFNs merely require the same room rates as are being charged by the hotel itself. was not alone among OTAs in requiring hotels to sign to MFNs.

The NCAs’ issue with the MFNs was that, by fixing a hotel room’s price at the same level as offered by other OTAs, the OTA benefitting from the MFN did not have to compete with other OTAs on the rate of commission charged to hotels. A hotel subject to a broad MFN would be unable to encourage lower commission OTAs who might be willing to offer lower room rates by charging lower commissions. offered identical commitments to the French, Italian and Swedish NCAs, bringing to an end their investigations. These commitments phased out the use of broad MFNs in their contracts in each jurisdiction, with the expectation that other EU NCAs would reach the same findings should continue to use broad MFNs in their territories. Each NCA accepted the commitments in a coordinated fashion, announcing their intention to do so on the same day, in April 2015.

What happened next, however, was clearly not coordinated. Although EU law prevents an EU NCA from adopting a decision contrary to a Commission decision, there is no mechanism to prevent EU NCAs from adopting contradictory decisions to each other. This has now occurred with the German NCA, the Bundeskartellamt, reaching its own decision in December 2015, that both the broad and narrow MFNs imposed by infringed EU competition law. Therefore, 2016 has begun with three pressing questions which are, as yet, unanswered:

  • Which (if any) other EU NCAs will prohibit narrow MFNs?
  • Whose interpretation on the legality of narrow MFNs under EU competition law is correct?
  • Will we ever see NCA-led pan-EU competition law enforcement again, given this failure to agree?

The Pay TV investigations: To what extent can territorial licensing survive in the internet age?

Historically, the European Commission has used competition law in order to drive forward the integration of the European single market. Agreements between competitors—and even non-competitors—to restrict the territories into which they supply goods and services have been regarded as breaches of the Article 101 of the Treaty on the Functioning of the European Union (TFEU), the prohibition on anticompetitive agreements. However, broadcasting has, until now, been something of an exception to the rule, as the Commission has recognized that national broadcasters generally broadcast only to viewers in one Member State. No longer.

In July 2015, the Commission sent a statement of objections to Sky UK, a UK telecommunications company and broadcaster, and the six leading Hollywood film studios. The Commission had come to the preliminary conclusion that the territorial restrictions between Sky and the studios were unlawfully restrictive of competition insofar as they gave absolute territorial protection to broadcasters outside of the UK. The Commission argued that as a result, Sky was prevented from providing its services to end-users based outside the UK. Simultaneously, the Commission is also undertaking investigations into Canal Plus, Sky Italia, Sky Deutschland and DTS’s arrangements with film studios and cross-border access to pay TV services in France, Italy, Germany and Spain. None of these have yet reached the formal objections stage. The roots of these cases go back to 2011, when the Court of Justice of the EU ruled in the Murphy case that an export prohibition on TV decoding devices was a restriction of competition “by object”, prohibited by Article 101 TFEU.

Murphy and the Commission’s Pay TV investigations raise a number of tensions with two well-established principles of EU law:

  • The principle that the right of communication to the public is not subject to exhaustion, i.e. the doctrine that that once a broadcast has been authorized in one part of the EU, it cannot be prevented from being broadcast elsewhere; and
  • The ruling in Coditel II, which states that a rights holder can limit the authorization that it grants—including its territorial scope—without infringing Article 101 TFEU.

The Commission’s public position appears to suggest it takes the contrary position.

Additionally, two directorates of the Commission (independent of the Commission’s competition directorate) are currently working on their own proposals for preventing what they describe as “unjustified geo-blocking,” whereby consumers of online content (including online Pay TV, a distribution channel recently taken up by Sky UK), are blocked and redirected based on their location, limiting choice. The directorates published an impact assessment on the subject in December 2015, noting that using competition enforcement to prevent unjustified blocking had major shortcomings. For example, any enforcement action would fail in cases where a non-dominant blocking entity was imposing the blocking on its own initiative (by avoiding the prohibitions of anticompetitive agreements and abuse of dominance).

Therefore, these investigations appear set to be both tricky and political. As a matter of good practice, the different directorates of the Commission will wish to avoid reaching contradictory conclusions. Hearings took place in the Sky investigation in January 2016, and a decision is expected later in the year.

Criminal cartel enforcement in the UK: A declaration of independence from US enforcement?

While criminal sanctions against individuals for cartel infringement are the norm in some jurisdictions, the UK has lagged behind. Until 2015, the only criminal convictions of UK citizens for cartel infringement had been driven by US law enforcement. For example, British Airways’ Keith Packer served time in Florida for his role in the Air Cargo cartel and the guilty pleas in the UK of the Marine Hose cartelists were procured by US authorities who had threatened them with extradition.

In 2015, the Competition and Markets Authority reported its first independently obtained conviction for a criminal cartel. The conviction was a guilty plea; those who chose to plead not guilty were acquitted. However, their successful defences rested on the prosecution failing to prove dishonesty, a requirement which has now been removed from the UK cartel offence. With the elimination of the dishonesty requirement, increased resources for criminal enforcement, and an independently gathered conviction in hand, the UK’s success in prosecuting cartels may be about to increase.

Focus on Canada

Competition Bureau advocates and policy-makes on innovation

The application of competition law to innovative business models will be a continuing theme in 2016. The Competition Bureau will play a lead role both as an advocate of competition policy in traditionally regulated industries and as an enforcer.

Over the past two years, Canadian municipalities have grappled with the regulation of new ride-sharing apps – most notably, Uber. In June 2015, the Ontario Superior Court of Justice declined to grant the City of Toronto an injunction against Uber, finding that, based on the wording of the relevant provisions of the Toronto Municipal Code concerning taxis, the Code did not apply to Uber’s business model. Following the Court’s decision, in a high profile White Paper submitted to the City of Toronto, the Competition Bureau advocated in favor of relaxing restrictions on taxis instead of increasing restrictions on digital ride-sharing services, such as Uber. We anticipate the Bureau will continue to advocate for deregulation of traditional taxis as the municipalities assess how to deal with Uber.

In 2015, the Bureau also publicly advocated in favor of a proposal of the Canadian Radio-television and Telecommunications Commission that would allow consumers to access video-on-demand (VOD) services unbundled from other services, such as a cable television or internet subscription. The Bureau believes that such reforms will assist Canadian providers to compete with online (over-the-top) providers, such as Netflix.

The Bureau published Draft Intellectual Property Enforcement Guidelines (IPEGs) for public consultation in the summer of 2015. The Draft IPEGs (which have not been finalized and remain in draft form at the time of publication), like previous incarnations of the IPEGs, reaffirm the Bureau's view that intellectual property rights and competition law are complementary. However, the Draft IPEGs also offer insights into the Bureau's approach to current issues, such as standards essential patents (SEPs) and patent settlements, and it is clear that the Bureau’s views have evolved. Whereas the Bureau indicated in 2014 that patent settlements that delayed generic entry beyond the life of the patent would generally be pursued as a criminal cartel matter, the Draft Guidelines now indicate that “in the vast majority of cases,” it will consider patent settlements under the civil provisions of the Act and that criminal enforcement will be the exception where the intent of the parties was to engage in price fixing, market allocation or restrict output. We anticipate that the Bureau will finalize its Draft Guidelines in 2016 and will be keen to investigate any credible complaint regarding a patent settlement that results in anti-competitive effects.

Competition Bureau to prioritize criminal enforcement against cartels and bid-rigging despite suffering some setbacks

The investigation of criminal cartel conduct remains one of the Competition Bureau’s most significant enforcement priorities. This is especially true of domestic cartel conduct and international cartels that have a material connection to Canada. The Bureau’s investigation into automobile parts, in particular, has been very active over the past two years, yielding a CA$4.5 million fine against Japanese bearings manufacturer, NSK, and a CA$4.7 million fine against Panasonic in 2014. Two corporations and two individuals in the ocean freight industry pleaded guilty to price-fixing charges and faced fines of approximately CA$1.7 million.

In 2015, two contested proceedings reached their conclusions: one in the Bureau’s favor and the other in favor of the accused. In particular, Pétroles Global was fined CA$1 million by the Superior Court of Québec for retail gasoline price-fixing. In the other case, a jury acquitted all accused in a bid-rigging case involving the procurement of IT services for government agencies. Another significant setback for the Bureau in 2015 was the staying of proceedings in the chocolate price-fixing proceedings against the remaining defendants. This marked the end of the Bureau’s investigation into allegations of price-fixing by Canadian chocolate manufacturers, which had been ongoing since 2007, pursuant to which Cadbury received immunity and Hershey pled guilty and paid a CA$4 million fine.

The Bureau’s prioritization of enforcement resources to Canadian cartels (such as retail gas and Québec construction), and international cartels with a significant nexus to Canada (such as auto parts) will continue in 2016. Moreover, international cartels will continue to attract attention from plaintiffs in class proceedings. In 2015, for example, the air cargo class action and lithium ion batteries class action were both certified by the Ontario Superior Court of Justice.

More economic evidence required for merger enforcement

In the first Supreme Court of Canada decision relating to the mergers provisions of the Canadian Competition Act in almost 20 years, the court reversed earlier decisions of the Competition Tribunal and the Federal Court of Appeal in the Tervita case, which required a divestiture of assets on the basis that efficiency gains exceeded anti-competitive effects. The court set forth a methodology for analyzing a merger in which there are anti-competitive effects as well as efficiency gains, and noted the Competition Bureau’s failure in that case to quantify “quantifiable” anticompetitive effects. The case may make merger challenges by the Bureau harder to win. In addition, it will have significant ramifications for how the Bureau proceeds in future cases where the efficiency defence is likely to be raised by the merging parties; in particular, a higher volume of economic evidence will need to be collected and adduced.

Focus on China

As China’s Anti-Monopoly Law enters its eighth year in force, its enforcement by China’s antitrust authorities has increased significantly. In 2015, China launched substantial enforcement actions in respect of monopoly agreements and abuse of dominance such as the Qualcomm investigation and a series of investigations in auto sector for monopoly agreements. Given that China, the world’s second largest economy, is still at a relatively early stage of antitrust law development, it can be expected that the Chinese antitrust authorities will accelerate the pace of enforcement in 2016 as they gain experience.

Chinese authorities crack down on cartels

fter more than seven years of enforcement of its Anti-Monopoly Law, China entered into a “new normal” phase in 2015. Both the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC), the two antitrust authorities responsible for pursuing cartels and other behavioral violations, are well-established and actively pursuing investigations against cartels.

In 2015, NDRC continued to crack down international cartels, including imposing a fine of $63 million on a Ro-Ro shipping cartel formed by eight carriers who fixed prices and shared markets. Similar to the auto parts cartel investigated by NDRC the year before, the Ro-Ro shipping cartelists who had been investigated in the US or EU previously raced to NDRC to apply for leniency. The first three carriers applying for leniency were granted fine exemption or reduction, underlying the importance for companies to include China in their global leniency strategy.

Another noteworthy category of cases to watch are cartels organized by government agencies. In a recent case, the NDRC prosecuted a local telecom regulator that organized four local telecom operators to coordinate on their sales promotion. The telecom operators were fined $2.12 million. This case demonstrates that it may not be an effective defense to argue that the cartel was arranged by a government agency.

SAIC investigated a number of domestic cartels in 2015, which mainly involved market sharing practices in sectors such as construction and insurance. Both sectors have been viewed as prone to conspiracies, and there have been a number of cases in these sectors during recent years. As a result, it is expected that a focus on these sectors will continue over the next several years. In addition, for the first time, SAIC has sanctioned a boycott organized by a trade association of exhibitions held by third parties.

For 2016, we anticipate that international cartels will continue to be in the crosshairs and sectors, such as transportation, and electronic components may be targeted. As for domestic cartels, industries including automotive, healthcare, telecom, insurance and construction, are expected to be under scrutiny.

China is in the process of refining its antitrust enforcement, with new legislation to come out in respect of immunity applications, a leniency mechanism and a fine calculation methodology. All of them will bring China’s cartel enforcement up to a new level.

Vertical agreements under scrutiny

Resale price maintenance (RPM) will be a continued focus of NDRC in its enforcement against vertical monopoly agreements. In 2015, NDRC fined two auto makers $75 million for restricting resale prices of their dealers, continuing NDRC’s antitrust reform of the auto industry since 2014.

In addition, healthcare is a key industry where NDRC has enhanced its RPM enforcement, partly due to complaints about the relatively high price of healthcare in China.

So far, neither NDRC nor SAIC has publicized decisions relating to non-price vertical monopoly agreements. However, SAIC has been studying how to deal with certain non-price restraints, such as exclusive distribution and MFN clauses. In addition, although China does not have a block exemption for vertical restraints as in the EU, antitrust guidelines being drafted for the auto industry will be useful references for other industries in respect of non-price vertical restraints.

Industries producing goods and services closely related to the livelihood of the general public will continue to be an enforcement and legislative priority for Chinese authorities in 2016. Companies doing business in China will need to ensure they avoid engaging either in resale price maintenance or non-price vertical restraints.

Abuse of dominance in intellectual property and domestic monopolies

The enforcement of abuse of dominance will continue to be an area to watch in 2016.

In particular, antitrust authorities are likely to pursue anti-competitive conduct relating to intellectual property rights (IPRs). Of significant interest will be how agencies address refusals to license IPRs (e.g., settlements or commitments to license under reasonable terms).

In addition, standard essential patents (SEPs) have become a focal point of China’s antitrust enforcement. In 2015, NDRC fined Qualcomm $975 million for its abuse of a dominant market position in the wireless communication industry by charging unfairly high royalties under its SEPs and tying its non-SEPs with its SEPs. NDRC has also pursued other companies, especially patent assertion entities, for similar anti-competitive practices.

Apart from challenging particular practices, NDRC is now taking the lead to draft antitrust guidelines for abuse of IPRs, which are expected to be enacted in 2016.

SAIC has made considerable efforts to remedy competition issues in domestic monopoly industries, such as telecom, water supply, gas supply and cigarettes, in addition to carrying out industry reform. SAIC has also taken enforcement action against a refusal to deal for the first time.

In 2015, SAIC sanctioned an abuse of dominance regarding a refusal to deal by a supplier of medicinal ingredients for gout who was found to hold a dominant position.

Merger control on the rise

The Ministry of Commerce (MOFCOM), the antitrust authority responsible for merger control, reviewed a record number of cases in 2015, representing a 36 percent growth from the previous year. Significantly, 74 percent of the cases were cleared within Phase 1 (i.e. 30 calendar days), primarily due to the simplified procedure introduced in 2014. The simplified procedure has significantly improved MOFCOM’s efficiency in reviewing merger filings, reducing the waiting period.

In 2015, only two cases were approved subject to conditions. With respect to Nokia’s acquisition of Alcatel-Lucent, MOFCOM required Nokia to commit to license its SEPs in the telecom industry under FRAND terms without misusing injunctions and to inform its licensees or potential licensees if it transfers certain SEPs to third parties in the future (in order to provide an opportunity to assess the impact of such transfer on the royalty rate charged by Nokia). This case is consistent with several previous cases involving SEPs where MOFCOM required commitments despite the fact that those SEPs holders had already undertaken to license their SEPs under FRAND terms in accordance with the policies of standard setting organizations.

The other merger case involved NXP’s acquisition of Freescale. This is the first case where MOFCOM applied a combination of fix-it-first remedy and an up-front buyer remedy, requiring NXP not to consummate the acquisition before divesting its radio-frequency power transistor business to a buyer who had been identified and approved by MOFCOM during the review procedure. This remedy was consistent with that adopted in the EU.

In addition to reviewing filings, MOFCOM also increased enforcement of filing requirements, penalizing parties to nine merger transactions. As the average investigation time for a failure-to-file case was 228 calendar days—much longer than the average review time for cases duly filed with MOFCOM—merging parties would be well-advised to comply with the merger control rules and avoid unnecessary costs.

Finally, in 2016, MOFCOM may issue revised merger control rules, which are expected to further improve the efficiency and transparency of MOFCOM's review work.

Private enforcement of antitrust law trending upwards

The enforcement of antitrust law through actions for damages by private parties is expected to increase significantly over the next year. Antitrust civil suits have become more common with 141 new cases being launched between January and October 2015. Two types of cases attracted the most attention: cases involving IPRs and cases involving consumers suing companies for damages following prosecutions by NDRC.

In regard to the first category, defendants are alleged to have abused dominant positions involving SEPs and other patents by charging unfairly high royalties, engaging in tying and refusing to license patents. While some of the cases have settled, some are ongoing including a case involving a refusal to license rare earth-related patents. A decision in this matter should shed light on the Chinese judiciary’s position on applying the essential facility doctrine to patent licensing.

The second type of case is the follow-on action case involving consumers suing companies after the latter were fined by NDRC for engaging in anticompetitive activity. Cases have involved civil suits following on from an insurance cartel and the distribution of infant formula.

Both types of cases have significant ramifications for companies doing business in China, and cases like these are expected to increase in the near future, on a larger scale. It is noteworthy that Chinese companies have been more sophisticated in utilizing antitrust law to achieve commercial goals, and Chinese consumers and consumers’ associations may increasingly initiate collective follow-on actions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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