EU & Competition Law Update – April 2016

Welcome to April’s edition of our EU & Competition Law Bulletin covering recent legal developments impacting upon you and your business:

  • European Union: EU Commission maintains close scrutiny of retail geo-blocking
  • France: The French Competition Authority buckles up the government’s driver’s licence reform
  • UK: CMA encourages overhaul of Britain’s franchising rail sector
  • Italy: Italian Competition Authority fines banks for mortgage interest rate collusion
  • Germany: German Federal Cartel Office finally concludes “rail cartel case”
  • Italy: Italian Competition Authority shakes up the dairy sector
  • France: France starts shaking up its legal services sector

European Union: EU Commission maintains close scrutiny of retail geo-blocking

On the 18th of March 2016, the EU Commission published initial findings from its e-commerce sector inquiry. The initial findings show a widespread use of geo-blocking throughout retailers in the EU. The findings reaffirm the Commission’s focus on this area and may lead to actions by the Commission later this year.

Geo-blocking is the practice of blocking online sales across borders by redirecting international customers back to their own domestic websites or blocking the use of foreign delivery addresses or credit cards. The headline findings are that 38% of the responding retailers selling consumer goods and 68% of digital content providers replied that they geo-block consumers located in other EU Member States.

The economic fear is that whilst e-commerce has expanded widely throughout the EU, cross-border e-commerce has expanded much more slowly. Whilst some of this can be put down to language barriers, the fear is that geo-blocking practises are creating artificial barriers, intending to maintain high pricing for goods through a lack of cross-border competition.

The Commission’s greatest obstacle in tacking geo-blocking however is the lack of legal weapon with which to fight it with. This is because the Commission’s findings show that much geo-blocking is done unilaterally by retailers and is not stipulated between suppliers and distributors (or at least not in writing). If a company is in a non-dominant position, then unilateral geo-blocking falls outside the prohibitions in EU competition law, a fact acknowledged by the Commission. 

To counter the above obstacle, the Commission is now openly threatening new legislation to combat geo-blocking, likely to be proposed in the coming months. Whilst moves by the Commission in this area are welcome to many EU consumers, retailers and suppliers will likely resist the moves to maintain lucrative national discrepancies in prices.

What the EU Commission cannot tackle however is the most common geo-blocking found for EU consumers, that being for access to American goods and pricing, often put up to protect pricing and geographical commitments, and due to differing EU/US product regulations. For instance, EU consumers are not likely to get access to US TV programming through American sources or able to capitalise on favourable exchange rates to buy branded clothes straight from the US, anytime soon.

The Commission’s final report on this issue is due in the first quarter of 2017.

France: The French Competition Authority buckles up the government’s driver’s licence reform

In February 2016, the French Competition Authority (“FCA”), tasked by the French government, published three separate opinions on the proposed French government reform of the driver’s licence examination conditions. The reforms aim at reducing the time and costs for candidates to obtain their driver’s licences.

The driver’s licence examination in France is and will continue to be made up of two parts: the driving theory test (known in France as the “Code”) and the practical in-car test.

In spite of a recent increase in the number of government inspectors, it still takes much longer in France to take the exam (an average 72 days in France compared to an average 45 days in the EU in 2015). Excessive waiting periods in France have come with a range of detrimental consequences for candidates such as (1) the need to take more driving lesson between the theory test and the practical test to keep up their level, thereby driving up the total price of a driver’s license, (as driving lessons in France are dispensed by private driving schools) (2) a delay in entering the workforce as many employers require job candidates to have a driver’s licence, and (3) being tempted to drive without a driver’s licence while finalizing the examination, which causes serious public safety concerns.

Overall, the FCA hails the reform as providing greater economic efficiency. For instance, the FCA approves of the proposed outsourcing of the theory test, the administration of which may now be delegated to certified third party operators. Furthermore, the FCA approves of the proposed regulation of fees charged to candidates by driving schools.

However, as the present system has produced discrepancies between the treatment of candidates from one driving school or another, the FCA calls for more equal access to the exam for candidates as well as for greater competition between driving schools.

In spite of the fact that the proposed reform provides that the method for the allocation of exam spots must be objective, transparent, non-discriminatory and must not encourage competition between driving schools, the FCA considers that the measures put forth by the government are not truly in line with this provision as the method of allocation of exam slots relies on the past level of activity of each driving school. The FCA suggests instead that the allocation method be based more accurately on a monthly assessment which would take into account the real-time number of candidates who have passed the theory test but have not yet taken the practical test.

Moreover, the FCA suggests the putting into place of an online individual system for candidates to register to take the exam, to replace the current system whereby registrations are made by the driving schools. Space would be allocated depending on the date of registration of each candidate, as is the case in the UK.

United Kingdom: CMA encourages overhaul of Britain’s franchising rail sector

On 8 March 2016, the Competition and Markets Authority (“CMA”) published a policy document recommending that the government overhaul the currently franchised rail system.

99% of Britain’s trains presently run under franchise agreements, which companies bid for and obtain from the government. The main criticism of the system is that rail operators face little to no competition; effectively being granted a monopoly when they are awarded franchise contracts.

After over a year of drawing up recommendations, the CMA has now opined that increased competition in the rail sector has the potential to lower fares and growth in passenger numbers, create greater incentives for operators to improve service quality and innovate, encourage greater efficiency by train operators, and boost more effective use of network capacity. Alex Chisholm, CMA chief executive, has stated that “there is strong evidence, both here and abroad, of the benefits that the introduction of competition on mainline intercity routes can bring.” Accordingly, the CMA recommends that the government increase the number of open access services and/or split up franchises, with a view to eventually replacing the entire franchise system with a licensing system under which multiple competing licensed operators would offer services on the same main intercity routes. A similar licensing system was considered back when Britain’s railways were first privatised in 1994, but it was scrapped due to operational concerns.

Which? executive director, Richard Lloyd, supports the CMA’s project and notes that “millions of passengers are not satisfied with the service they are receiving on Britain’s railways…but on open access lines, where there is more competition between train companies, satisfaction is significantly higher”.

However, not all reviews of the proposals have been positive. Notably, there are legitimate concerns about the impact that greater competition might have on the income received by government from franchise operators. There are also concerns that the project may not be workable in practice – Mick Whelan, general secretary of Aslef (the UK union for train drivers and operators), stated that “competition in the rail industry is a myth…there is only one set of tracks.”

Regardless of the logic of imposing a more competitive environment for train companies, other economists and experts are more sceptical of the appetite for true free market reform of the rail system. Perhaps the largest obstacle to any true market reform, and the possible lifting of standards, is the political status quo reached between both politicians and the general public that the train system is a non-negotiable public service, not one of several and optional transport options for the country. Therefore any market reform which saw full privatisation and unprofitable lines and infrastructure being turned into toll roads, express bus routes or even the land being sold to property developers, would be greatly opposed.

Likewise any reforms that saw fares being freed from regulation (and being made more expensive) would be equally as unpopular with the public.

All genuine market reforms would require a rethink of the public’s relationship with the rail system, and for the foreseeable future, the semi-privatised model we have with its benefits and drawbacks looks like the status quo for many years to come.

The policy document is currently under consideration by the Secretary of State for Transport.

Italy: Italian Competition Authority fines banks for mortgage interest rate collusion  

As we reported in May, the Italian Competition Authority (the “ICA”) opened an in-depth investigation into six (then extended to other ten) banks operating in the Province of Trento and Bolzano (the “Banks”) for the alleged infringement of Article 2 of the Italian Law No. 287 of 1990 and/or Article 101 TFEU, the provisions against anti-competitive agreements.

The background of the case was that after a complaint filed by the consumer association “Centro Consumatori Utenti Alto Adige” (the “Claimant”), the ICA started an in-depth investigation alleging the existence of an anti-competitive agreement aimed at setting a minimum mortgage interest rate among the Banks.

Such investigation was initially based on the outcome of a comparative survey carried out by the Claimant itself in November 2013, then the ICA found that the Banks all provided for a minimum mortgage interest rate set at 3% called “rate floor”. In essence, the interest rate could never be below the said threshold.

Following this, on 4th March 2016 the ICA held that the homogeneous application of the interest rate threshold among the Banks amounted to setting a minimum price for mortgage. Further, the ICA found that the minimum price was decided by the Banks through the sharing of sensitive commercial information among them.

Such behaviour would constitute a hard-core restriction of competition (setting a minimum price) and would aim at avoiding interest rate price reduction to the detriment of mortgage subscribers.

In addition, the ICA found that the anti-competitive agreement among the Banks would infringe Article 101 TFEU as the territory of Trento and Bolzano borders another European Union Member State (Austria).

The collusion therefore caused damages on commercial trade between two Member States, at the least.

The decision is likely to hasten reform of the Italian banking sector, a sector which despite recent legislative interventions, appears unwilling to keep up with the pace of change in international banking.

Germany: German Federal Cartel Office finally concludes “rail cartel case”

With decision dated 10 March 2016, the German Federal Cartel Office (FCO/Bundeskartellamt) concluded the “rail cartel case” by imposing a fine just under EUR 3.5 million on Vossloh Laeis GmbH & Co. KG.

Having already fined eight rail manufacturers for being members of a market sharing and price fixing cartel back in 2013, the FCO found also Vossloh Laeis GmbH & Co. KG had been participating in this cartel to the detriment of local public transport companies, private, regional and industrial railways and construction companies.

In the years 2001 to 2011, several rail manufacturing companies made agreements on price and consumer protection in the product areas rails, switches and sleepers. During the period 2005 to 2011 Vossloh Laeis GmbH & Co. KG engaged in these agreements, whose sole purpose was to split tenders and projects among the different members of the rail cartel.

Due to the existing customer relationships and the knowledge about the respective customer preferences, it was foreseeable in many cases which of the companies was to be given the award. This company then would organize and coordinate the biding procedure, for example by telling the other members of the cartel which prices they should communicate to their customers in fake bids.

Whereas the proceedings against the other companies ended with fines amounting in total to almost EUR 100 million that had been agreed upon by the parties in the form of settlement, no such settlement could be reached with Vossloh Laeis GmbH & Co. KG. It is still important to note that the company’s cooperation with the respected authority throughout the proceeding had been taken into consideration with respect to the amount of the fine.

Italy: Italian Competition Authority shakes up the dairy sector

On 11th March 2016, the Italian Competition Authority (the “ICA”) issued a public statement, seeking new legislative rules to govern the dairy sector.

In May 2015 the ICA started a public investigation into the Italian dairy sector as the sector was experiencing a serious economic crisis. The ICA required public authorities to recognise several producer organizations able to carry out an effective concentration and centralization of commercial services.

The ICA referred to guide-lines issued by the European Union, which authorized the process of reorganization of the dairy sector in the internal market, to increase the efficiency of each individual undertaking.

The ICA investigation intended to highlight from a competition law standpoint some specific problems in the functioning of the diary sector, problems which were able to influence the final prices of dairy products.

In particular, many dairy undertakings complained that there was little correlation between the prices charged to consumers for the finished product and those applied to farmers for raw milk.

However, the investigation showed no competition violations by any undertakings involved.

The ICA pointed out that the price uniformity of raw milk could be attributed primarily to the present commercial practices where raw milk prices (which are negotiated with the main purchaser in Italy) are publicly available, making those prices a benchmark for the sector.

In light of that, the ICA held that it is really important for viable competition of the dairy sector to better define the negotiation criteria. To such extent, the ICA also alleged that public authorities should encourage the creation of a bigger professional association, having the power to concentrate supplies and centralise services.

France: France starts shaking up its legal services sector

The French Competition Authority (“FCA”) made public an opinion addressed to the French Government on 29 February 2016, following the publication by the Government of a decree regarding the rates applied by certain of France’s many legal professions. This decree implements the so-called “ Macron Law” of 6 August 2015, named after the French Minister of Economy.

The Macron Law (particularly controversial at the time it was adopted) covered a broad range of “pro-business” measures such as loosening Sunday-trading rules, liberalising the country’s inter-city coach industries and deregulating some of France’s legal professions. The professions targeted by the Macron Law include notaries, bailiffs, court appointed administrators and liquidators, judicial auctioneers and commercial court registrars. The FCA’s opinion regretted that the implementing decree left lawyers (“avocats”) outside of its scope, even for the few services provided by lawyers which are subject to regulated rates.

The decree seeks to set rates based on cost of services, while ensuring that professionals receive reasonable remuneration. The FCA responded favourably to that objective and pointed out that this would create incentives to improve efficiency. In the FCA’s view, should average costs be taken into account in order to set prices, professionals would be encouraged to increase their margins by improving production processes.

The FCA also stressed the need to strengthen competition and recommended a number of measures such as greater flexibility in the discounts that may be granted, the removal of fixed pricing structures for certain optional notarized deeds, imposing a strict limit on the scope of services and professionals eligible for expensive “emergency rates”, or even capping registration fees in order to ease the sale of low-value assets.

While the FCA’s opinion was generally favourable to the implementing decree, it nonetheless emphasized the need to review the decree in the next five years.

In parallel, the FCA launched a public consultation with the objective to prepare a map of France setting out areas where notaries, bailiffs and judicial auctioneers could freely establish themselves without the current geographic limitations. Given how entrenched the traditional numerous clausus rule remains in the French culture, this change would be a small revolution.

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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