EU & Competition Law Update – June 2016

BREXIT – BUSINESS AS USUAL...AT LEAST FOR NOW

Office – London
Author – Robert Bell

What do you need to know?

Despite the UK's vote to leave the European Union ("EU"), companies doing business in the UK can still continue to trade with the EU in exactly the same way as they have done in the past, at least for the time being.

The UK is still a member of the EU and until it negotiates an exit deal, or the two year period for the re-negotiation for such a deal expires, the UK remains a full member of the EU subject to its rights and obligations under the EU treaties.

The vote

The UK woke up on the 24 June 2016 to the news that the UK had voted to leave the EU by 52% to 48%. 

Although the vote was always forecast to be close, the British public voted by a larger than expected margin to leave. The British Prime Minister, Mr. David Cameron, has stepped down and Theresa May is taking over as Prime Minister from 13th July 2016.

So, in the aftermath of this historic vote, what does this really mean for companies trading in the UK and their access to the European single market?

The hysterical reaction of a number of UK politicians would lead us to believe that this vote will immediately lead to a reappraisal of the UK 's relationship with the EU and that many EU laws will now change.

While the vote has certainly heightened uncertainty in the international markets, companies trading in the UK will not be affected in the aftermath of this vote. Their ability to access the single EU market tariff free and conduct business will remain unchanged.

The Exit Process

Now that the UK has voted, the UK has to give notice to leave the EU under Article 50 of the Lisbon Treaty. Once it does, there is a two year period in which to negotiate an exit treaty. Once that period ends, the UK leaves the EU whether an exit treaty has been negotiated or not. The two year period can be extended by mutual agreement of the UK and the EU.

The UK has not yet given notice under Article 50 and it is unclear when it will. Several leading Brexiteers have argued that they want to negotiate the terms of the UK's divorce without being put in the straightjacket of the two year period. The EU says it won't negotiate leaving terms until Article 50 is exercised.

However, until an exit treaty is signed or the two year period expires (or any extensions mutually agreed between the UK and the EU) the UK is fully bound by its EU Treaty rights and obligations. That means that unless the UK wants to breach its international treaty obligations it cannot dis-apply EU law nor the reach of the CJEU judges.

So, from a legal perspective nothing is going to change for a long time. In fact the UK is still going to be legally obliged to implement new EU Directives as long as the UK is a member. Depending upon the terms of the UK's exit deal, the country may still find itself having to implement those laws to gain access to the EU single market and to obey the free movement rules.

The vote is only the start of a long process and the challenges of the Brexit issues, both legally and politically, are only just beginning.

Where do we go from here?

The UK has to negotiate a deal to leave the EU. No Member State has seceded from the EU. Only Greenland (as part of Denmark) left and that was over 25 years ago. The UK is in unchartered waters. 

However, it appears clear that the EU is unlikely to do the UK any favours in these negotiations. It will not compromise its fundamental principles of free movement of goods, services, capital and people and so the UK may have to rely on international trading rules to access the EU markets which may mean tariffs and other restrictions or – much more likely – agree a free trade deal based on membership of the EEA (like Norway).

Many political commentators believe that if the UK does not negotiate to have free access to the EU single market the UK Parliament is unlikely to ratify the Treaty. The Leave vote did not cover what the leaving terms should be so it is far from clear how the Brexit drama will play out.

This is unlikely to be a "leave the EU at all costs" vote. It is more likely to be just re-arranging the chairs in this EU game of musical chairs.

TWO-STAGE CONTROLS IN FRENCH POLYNESIA: NEW COMPETITION AUTHORITY SET TO REVIEW THE PURCHASE OF HOTEL PROPERTIES BY CHINESE GROUP

Office – Paris
Author – Kathie Claret and Francois Xavier Mirza

One of the first missions of the French Polynesian Competition Authority ("PCA"), which was created in February 2015 but which officially started its activity a year later, will be to rule on the proposed purchase by HNA Tourism Company Ltd of the entire share capital of two hotels belonging to prominent French Polynesian businessman Mr. Louis Wane: the SA Moorea Lagoon Resort (owner of the Hilton Moorea Lagoon Resort & SPA in Moorea) and the SARL Société Hôtelière Motu Ome'e (owner of the hotel St. Régis in Bora Bora). 

HNA Tourism Group Company Ltd is a subsidiary of the large private Chinese group, Hainan Airlines, founded in 2000. It is involved in a range of activities across multiple tourism-related sectors including air transport through Hainan Airlines (ranked fourth in the Chinese aviation industry).

Pursuant to the so-called Organic Law of 2004, which sets out the various fields of law which are reserved to France and those which fall within the ambit of the French Polynesia semi-autonomous regime, any foreign (i.e., non French-controlled) investment in French Polynesia relating to the acquisition of real estate rights, fishing, aquaculture, pearl and mother-of-pearl, or the audiovisual or telecommunications sectors requires prior authorization from the French Polynesian government. In the present case, HNA Tourism received such authorization, published on 21 April 2016.

However, pursuant to the French Polynesian Law of 23 February 2015, the proposed purchase is considered a potential concentration subject to review by the PCA, since the total net turnover of both groups involved is greater than 2 billion XPF (approximately 16.8 million euros) and the total net turnover of each individual party group is greater than 500,000,000 XPF (approximately 4 million euros). Thus, with its foreign investment authorization in hand, HNA Tourism Company Ltd, in accordance with the law, notified the proposed purchase to the PCA on 7 June 2016. Assuming that such notification file is complete, the PCA has 25 days to render a decision.

This case is amongst the first "merger control" cases to be reviewed by the newly created PCA, which has the power to refuse or authorize the purchase or subject it to additional conditions in order that competition not be distorted. 

GERMAN FEDERAL SUPREME COURT CODIFIES RULES ON CONCERTED PRACTISES AND INFORMATION EXCHANGE

Office – Germany
Authors – Eckart Budelmann

On 12 April 2016, the Cartel limb of the German Federal Supreme Court in Karlsruhe (the "Court") codifies its rules on concerted actions between market participants from an antitrust perspective.

Case No. KZR 31/14 involved a claim by a broadband cable provider (the "Plaintiff") that ten major public service broadcasters (the "Defendants") had been colluding in such a way as to restrict and distort competition within the market. Specifically, the Plaintiff alleged that the Defendants had exchanged commercially sensitive information, conspired to restrict their services to digital broadcasting, and agreed to terminate their existing contracts with broadband cable providers.

Despite there being no written contracts in evidence to this effect, the Court nevertheless opined that the contract terminations were unlawful under Sec. 1 German Competition Act, which prohibits agreements and concerted practices between undertakings which have as their object or effect the prevention, restriction, or distortion of competition.

In the view of the judges, a concerted action with anticompetitive effect will be automatically proven where competitors exchange information regarding their future market behaviour. Such conduct inevitably violates the principle of a competitive market in which each participant must decide independently on the market strategy pursued, and inescapably has a detrimental effect on the relevant market.

In its decision, the Court has limited the scope for inter-company information exchanges and adopted a presumption of detrimental competitive effect in such circumstances. As the burden of proof in such cases rests with the defendant, it remains to be seen what level of proof the courts will require from defendants in order to disprove an alleged violation of Sec. 1 German Competition Act.

MODEL BEHAVIOUR?: HAVE THE UK’S TOP MODELLING AGENCIES BREACHED COMPETITION LAW?

Office – London
Authors – Nicola Conway and Roman Madej

On 25 May 2016, the UK's Competition and Markets Authority ("CMA") issued a statement of objections to five of Britain's most prestigious modelling agencies alleging an infringement of Chapter I of the Competition Act 1998 and/or Article 101 of the Treaty on the Functioning of the European Union ("TFEU").

The CMA's investigation, which was launched back in March 2014, has revealed that the five prominent agencies may have exchanged sensitive and confidential competitive information and colluded to fix prices between April 2013 and March 2015. Specifically, concerns have been raised that the agencies agreed on a common approach to setting their fees in an effort to reduce customers' abilities to play agencies off one another. Such a strategy benefits models (whose wages increase) and their agencies (which are generally entitled to a percentage of models' earnings) – but it unavoidably dampens competition.

The Senior Director of the CMA's Cartels and Criminal Group, Mr. Stephen Blake, has stated that "the allegations concern prices charged to a range of customers, including high street chains, online fashion retailers and consumer goods brands. The CMA alleges that these five model agencies sought to achieve higher prices in negotiations with their customers by colluding instead of competing."

This is the first competition enforcement case taken forward by the CMA in the creative industries, and as such it represents a test case for the CMA in many ways. In contrast, the CMA is well-versed in imposing fines for cartel activity in relation to commodities – take, for example, canned mushrooms, alternators and starters, and optical disc drives.

The peculiarity of the case raises an interesting predicament. The punishment of price coordination in these circumstances would benefit retailers and consumers alike since inflated fees charged by the agencies to retailers, which are inescapably borne by customers as the costs trickle down the retail chain to consumer level, would be reduced. However, increased price competition in this sector of the economy would disadvantage working models whose wages (and potentially working conditions) would be subject to more aggressive negotiation, and inevitably lowered.

No conclusion of illegal conduct has been reached at this stage; the CMA must first consider the responses from the recipients of its statement of objections before it reaches any decision. In the event that the alleged market manipulation is proven, the agencies may find themselves exposed to significant fines of up to 10% of their worldwide revenue, whilst directors may face disqualification from UK company directorship for 15 years and even, in extreme cases, imprisonment for up to 5 years.

The CMA's decision is highly anticipated.

ITALIAN POSTAL SERVICE RECEIVES A HOWLER

Office – Italy
Authors – Mr. Luigi Zumbo and Mr. Arturo Battista

On 8 June 2016, the Italian Competition Authority ("ICA") opened an in-depth investigation into Poste Italiane S.p.A. (the "Accused Company"), the former public postal services operator.

The investigation was commenced after a complaint was filed by competing Italian company, Nexive S.p.A. (the "Complainant"), which reported conduct allegedly amounting to an abuse of dominance in contravention of Article 102 of the Treaty on the Functioning of the European Union ("TFEU").

In particular, the Complainant states that the Accused Company, which enjoys a dominant market position, costs its services to large business users in such a way as to exclude other operators in postal services from the market.

The alleged wrongdoing is not 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 TFEU on the grounds that it would adversely affect trade within the EU.

NO RELAXATION OF FRENCH PAY TV COMMITMENTS

Office – Paris
Author – Kathie Claret and Raphaël Roditi

By decision rendered on 9 June 2016, the French Competition Authority ("FCA"), in accordance with the Conseil Supérieur de l'Audiovisuel (the French broadcasting authority), rejected a request by French pay TV pioneer Canal Plus to obtain clearance for the acquisition of exclusive broadcasting rights for the Qatar sports channel, beIN Sports, on the grounds that "the conditions are not currently satisfied to lift the ban on exclusive broadcasting of premium sport channels pronounced against Canal Plus".

In 2006, the Canal Plus Group company ("CPG") had been authorized by the Minister of Economy to buy TPS, its main pay TV competitor, and to merge it with CanalSat in which it held a majority stake, subject to 59 commitments. On 20 September 2011, the FCA sanctioned the non-compliance by CPG with certain of these commitments by withdrawing the merger authorization and imposing a 30 million euro fine. The proposed operation was the object of a new merger review after which the FCA, by decision rendered on 23 July 2012, gave its authorization subject to compliance with 33 injunctions designed to restore sufficient competition in the pay TV market. These injunctions were imposed for a five-year period, after which a further competitive analysis is to take place. Moreover, the FCA provided that the parties could seek a lifting or an adjustment of the injunctions in the event of fundamental changes.

Notably; among these measures is injunction no. 4(a) which prohibits the broadcasting of premium sports channels by CPG under an exclusive distribution contract.

On 16 February 2016, CPG sought clearance from the FCA to enter into an exclusive distribution contract with beIN Sports before the expiry of the commitment. It was argued that circumstances had changed since 2012, in particular that the competition situation had evolved with the emergence of new players and a wider choice for consumers since the merger of SFR and Numericable. Moreover, in order to relieve anticompetitive concerns, CPG proposed another range of commitments.

Nevertheless, the FCA rejected this review request due to what it considered to be a lack of sufficiently changed circumstances of law and fact since the 2012 decision - it considered "the anticipated review of the injunctions no.4(a) and 8(a) to be unjustified to this date, even if it were accompanied by the adoption of the commitments proposed by CPG". 

The FCA considered that, as was the case in 2012, the market structure is still close to a duopoly with CPG and beIN sports holding the broadcasting rights of the quasi-entirety of the most appealing sports competitions (particularly football rights). Likewise, on the downstream market of distribution of pay TV services, CPG also holds a dominant position with a market share comprised between 70% and 80% (according to the FCA).

Therefore, the FCA considers that the measures implemented in 2012 form a coherent whole and that injunction no.4(a) cannot be analysed independently of others, in order to preserve competition while maintaining sufficient consumer access to differentiated offers.

This is considered to be a setback for CPG, which counted on the beIN Sports agreement to revive its client base after a recent period during which Canal Plus has been losing subscribers and suffering recurrent financial losses, a difficult situation that even the Conseil Supérieur de l'Audiovisuel acknowledged (although those circumstances were not sufficient for it to issue a favourable opinion on the project).

BADE RECEPTION - ITALIAN COMPETITION AUTHORITY'S TV PROGRAM SERVICES CARTEL DECISION OVERTURNED

Office – Italy
Authors – Mr. Luigi Zumbo and Mr. Arturo Battista

On 6 June 2016, the Italian Administrative Court of Latium (the "IAC") sought to overturn a €793,829 collective fine previously imposed by the Italian Competition Authority (the "ICA") on 23 companies providing TV program services in Italy (the "Companies").

The fine was imposed on the grounds that the Companies had colluded in relation to their bids during a 2013 tender competition involving RAI-Radiotelevisione Italia S.p.A. ("RAI"), the Italian state-owned television incumbent.

Such tenders were based on a "lowest bid mechanism". The ICA held that the discounts were too similar to be the result of true competition and considered that the Companies had already decided amongst themselves who the tender winner should be, in violation of Article 2 of Law No. 287/1990 (the Italian provision against anti-competitive agreements). 

However, the ICA decision was challenged by the Companies and the IAC has now opined that the conduct of the Companies should not be considered illegal on the grounds that the ICA had not taken into account the fact that RAI enjoyed a dominant position (a de facto monopoly) on the demand side. Indeed, RAI represented the only possible "client" of the TV program services and consequently it was able to decide the winner of the tender and/or the price; making the alleged collusion of the Companies irrelevant from a competition law point of view.

In light of the IAC opinion, an appeal of the decision before the Italian Supreme Administrative Court ("Consiglio di Stato") is anticipated.

[View source.]

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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