EU & Competition Law Update - March 2016

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

  • United Kindgdom: Large pay for delay fine imposed by CMA

  • Germany and EU: Facebook accused on an abuse of dominance by German competition regulator
  • France: Will the hard of hearing soon be heard?
  • Italy: Italian Competition Authority investigates banking services sector
  • United Kingdom: Public authorities political boycotts unlawful
  • France: Paying to negotiate: Ever more creative supermarket retailers
  • Italy: The Italian Administrative Court overturns ICA decision over burden of proof

United Kingdom: Large pay for delay fine imposed by CMA

On 12th of February 2016, the UK Competition and Markets Authority (CMA) fined GlaxoSmithKline (GSK) and the successor companies to Alpharma Limited around £45m in total for breaches of Chapter I of the Competition Act 1998, the prohibition against anti-competitive agreements. The case shows the continued danger in pharmaceuticals reaching settlement agreements in IP disputes with generic drug providers.

The case in question relates to agreements between GSK and Alpharma, made between 2001 and 2004. The drug in question was paroxetine, an anti-depressant and allegedly profitable drug for GSK, which garnered £90m in sales in 2001. GSK held patents relating to this drug and when Alpharma attempted to bring generic equivalents to GSK’s product to market, GSK threatened Alpharma with litigation, alleging patent infringement. GSK then entered into settlement agreements with Alpharma over this patent infringement, closing the issue. The terms of that settlement agreement are key in that Alpharma were effectively (according to the CMA) paid not to enter the market with a generic alternative for a number of years, protecting GSK’s product.

This is the latest ‘pay for delay’ case and joins similar penalties imposed in a number of other cases by competition authorities, both in the EU and in the US. The CMA’s belief is that the behaviour kept the price of the product artificially high, costing the UK National Health Service millions. This was evidenced by a 70% fall in the price of the product after 2003, when generic production of the product finally started.

Whilst the CMA’s logic looks clear, producers of patented pharmaceuticals have once again been penalised for protecting their patents and settling cases out of court. Whilst in some circumstances such behaviour could be seen as deliberately anti-competitive, it does leave pharmaceutical producers in a position where it would be difficult to settle ‘generic’ cases out of court, without being accused of pay for delay behaviour. What for instance is the position when the large pharmaceutical provider is genuinely litigating to defend a patent that had not yet expired?

It would seem in such circumstances, the competition regulator would have to first rule on the patent dispute in question to decide whether it was legitimate, before deciding on the possible anti-competitive effect of any settlement agreement. The regulator is not in a position to make such patent based findings and so these pay for delay cases are prosecuted on the assumption that the patent enforcement was illegitimate. Although not privy to the details of the case, damaging internal emails at large pharmaceutical firms referring to a desire to illegitimately delay generic entry are a good example of likely evidence for competition regulators.

It could also be argued that such decisions by the CMA could actually hurt generic providers and the wider market by forcing large pharmaceutical firms to litigate to conclusion all alleged patent infringements, creating huge legal costs for smaller, accused companies. It should be noted that Alpharma’s successor companies were fined for accepting the settlement offer, alongside GSK.

Germany and EU: Facebook accused on an abuse of dominance by German competition regulator

On the 2nd March 2016, the German Federal Cartel Office (FCO) initiated proceedings against Facebook’s European and German entities, accusing the company of abusing its market power. The case follows a logical progression of regulators seeking to regulate alleged abuses of dominance in new technologies as they impact upon consumers. The first such target was software, then search engines, and now social media websites.

An abuse of dominance is a competition law offence under Article 102 of the TFEU. It is normally associated with conduct such selling below cost to squeeze out competitors, or discriminating between suppliers. Whilst not disclosing much in the way of detail, the FCO allege that Facebook have abused their dominant position by imposing unfair trading terms on consumers, specifically as to the amount of data they capture about them. The FCO has singled out the fact that users are in a poor position to understand the scope and amount of data captured by the company, for advertising purposes and otherwise, and that Facebook is using its dominant position to amass that data.

Although just announced, the case is likely to draw heavy media attention throughout its life. Given the nature of the allegations, Facebook may choose to close the investigation by changing its data collection terms in Europe, or at least informing consumers further of what they are signing up to. Whilst the German FCO (and the EU Commission, with whom they are liaising) are championing the rights of consumers, the EU is once again seemingly throwing up a regulatory opposition to US companies in Europe, something unlikely to be missed by American politicians who now regularly accuse the EU of aggressively pursuing US companies for alleged infringements of laws. However, the hard fact is that there are few major EU technology companies and the internet is presided over by the activities of the Silicon Valley giants, leaving the EU little choice of whom to target in its investigations.  

France: Will the hard of hearing soon be heard?

Pursuant to Article L 462-4 of the French Commercial Code, the French Competition Authority (“FCA”) has the ability to carry out investigations, at its own initiative, on any competition-related issue.

On 10 February 2016, the FCA decided to review the hearing aid market, suspecting that the high price of the devices discourages potential customers. In fact, the average cost of hearing aids in France is € 1,550 per device, representing a yearly turnover close to € 1 Billion, but only about 32% of the hard of hearing in France are equipped with a hearing aid device, compared to 41% in the UK.

Besides high prices and a comparatively low rate of hearing aid use, other factors which led the FCA to look more closely into the hearing aid market include the following:

  • The market structure is oligopolistic, with only six main manufacturers in the world, four of which share over 80% of the global market (Sonova, Starkey, Siemens, and William Demant).
  • The margin earned by hearing care professionals (“audioprothésistes”) is substantial and can be as high as 3.5 times the cost of purchase from manufacturers.
  • Due to a lack of publicly available information on the products, hearing care professionals may be in an advantageous position to talk customers into purchasing the more expensive devices.  

Therefore, the FCA has announced it will notably (i) consider the potential anti-competitive effects of the current structure of the hearing aid market, (ii) review the high profitability of hearing care professionals in light of the level of services they actually provide to customers, (iii) look into ways to reduce the asymmetry of information, but also (iv) evaluate the entry requirements to the profession of hearing care professionals (the number of students enrolling in French hearing care professional diploma studies was restricted in 2015).

The FCA will start conducting a market survey by interviewing all interested parties (manufacturers, distributors, doctors, and consumers alike) and by holding a public consultation. The FCA will publish its official recommendations in December 2016.

Italy: Italian Competition Authority investigates banking services sector

On 21st January 2016 the Italian Competition Authority (the “ICA”) opened an in-depth investigation into the Italian Banking Association (hereinafter “ABI” or the “Accused Association”) operating in the market for the supply of banking services to businesses, for an alleged infringement of Article 101 of the Treaty on the Functioning of the European Union (“TFEU”); the prohibition of anti-competitive agreements or concerted practices.

The investigation stemmed from the 17th December 2013 when the ABI filed with the ICA the interbank agreement (the “Agreement”) for the providing of the service called Sepa Compliant Electronic Database Alignment (“SEDA”).

The ABI is the Italian banking association involving 626 banks (also foreign banks) along with financial intermediaries and other smaller banking associations. The Agreement was filed in order to get the preventive clearance of the ICA, as required by Italian laws. The SEDA is an optional add-on service established by the Agreement whereby all the banks belonging to the ABI offer to the businesses requiring information, about the financial soundness of the relative commercial counterpart. In particular, SEDA would work together with the Sepa Direct Debit service (“SEPA DD”), which is a banking service also provided by the ABI in order to assure the transfer of the funds from the debtor to the creditor in the ordinary course of trade.

In a nutshell, the ABI would offer on the one hand a basic system of electronic commercial payments (“SEPA DD”) and on the other hand the SEDA service, comprising important financial information. The SEDA and the SEPA DD cannot be provided separately.

The ICA alleges that the Agreement goes beyond the legitimate commercial practices as it would set forth a specific pricing system for the SEDA, impeding de facto the relative business to choose among different prices. Through this strategy, the businesses/clients involved would sustain far higher costs which they would have borne without the Agreement.

In light of the above, the ICA alleges that the conduct is incompatible with Article 101 of the TFEU as the Agreement would concern a large part of the Italian market, having the effect of reinforcing the partitioning of national markets within the European Union and reducing the economic integration of the Member States. The alleged wrongdoing is not proven at this stage and the investigation continues.

United Kingdom: Public authorities political boycotts unlawful

On 17 February 2016, the Cabinet Office published a Procurement Policy Note ("PPN") which seeks to prevent public authorities from participating in boycotts and other political decisions which affect decision making and public spending.

Some public authorities, namely local government councils, including the City Councils of Leicester, Birmingham, Swansea and Gwynedd, have been and imposing such boycotts, commonly on grounds of the alleged Israeli occupation of claimed Palestinian territory. These boycotts are likely to be unlawful interventions under the EU public procurement rules and capable of challenge.

The boycotts effectively discriminate against Israeli suppliers and thereby contravene the World Trade Organisation Government Procurement Agreement ("WTO GPA"), which requires all signatories to treat suppliers equally. The PPN clarifies that "boycotts in public procurement are inappropriate, outside where formal legal sanctions, embargoes and restrictions have been put in place by the UK Government".

The PPN highlights the dangers of such boycotts including the potential to "damage integration and community cohesion within the United Kingdom, hinder Britain's export trade, and harm foreign relations to the detriment of Britain's economic and international security". It also gives guidance, setting out how contracting authorities "can ensure compliance with wider international obligations when letting public contracts".

All contracting authorities, "including Central Government, Executive Agencies, Non Departmental Public Bodies, wider public sector, local authorities and NHS bodies" should now be aware that, by imposing such boycotts, they make themselves vulnerable to severe penalties "such as damages, fines and ineffectiveness (contract cancellation)."

As reported widely in the media, local councils considering boycotts on political grounds are also discouraged by pressure groups such as the Jewish Human Rights Watch, who actively pursues judicial review proceedings against such authorities, alleging such boycotts amount to anti-Semitic behaviour.

It remains to be seen as to whether boycotted companies which have been denied tender opportunities will join judicial review proceedings or sue under EU public procurement rules, on the basis of bids they have been excluded from.

France: Paying to negotiate: Ever more creative supermarket retailers

The practices of large supermarket retailers are at the centre of an investigation launched by the DGCCRF (the General Directorate for Competition Policy, Consumer Affairs and Fraud Control) relating to their annual negotiations with suppliers. Pursuant to the provisions of article L.441-7 of the French Commercial Code, the requisite annual contract resulting from negotiations between suppliers and retailers must be finalized before the end of February.

The DGCCRF investigation into ongoing commercial negotiations follows complaints filed by suppliers accusing the large supermarket retailers, under the pretext of higher operational costs, of imposing the payment of a significant amount prior to entering into 2016 negotiations. Through the imposition of this payment, the retailers implied that those who did not pay would be disqualified from the negotiations. Furthermore, details of how the payment was calculated were allegedly not given to suppliers.

All but one of the group of large supermarket retailers tried to institute this specific practice, which may be yet another consequence of the ongoing price war exacerbated by the oligopolistic nature of the large retailer market in France, particularly in the food and beverage sector, as well as the creation of the supermarket groups’ centralized purchasing bodies. For more than a decade, the commercial referencing practices, unjustified “commercial cooperation” and contractual imbalances imposed by the large retailer chains upon their suppliers have come under fire (and resulted in significant fines) by the administration, the courts and the legislature. In 2015 alone, the Trade Negotiations Observatory established by the national association of food industries (ANIA), received more than 260 complaints from suppliers of all sizes related to illegal demands from large supermarket retailers.

Pursuant to article L.442-6 II (b) of the French Commercial Code, all practices consisting of imposing conditions prior to negotiations are considered abusive. The mandatory payment prior to starting negotiations with suppliers seems therefore to be unlawful and could be prosecuted by the French Ministry of Economy. The retailers concerned may be playing with fire since they could be liable to pay a fine of up to 5% of their turnover under the new provisions of the “Macron law” of 6 August 2015.

In its press release from 12 February 2016, the French Government warned large supermarket retailers that it may consider tightening the law governing commercial negotiations if the consequences thereof for 2016 were to result in reduced prices received by suppliers in struggling industries, particularly those of agricultural and dairy products.

Italy: The Italian Administrative Court overturns ICA decision over burden of proof

With two judgments of 18th December, the Italian Administrative Court (hereinafter the “IAC”) upheld the appeals brought by two Italian insurance companies (the “Companies”) against the decision of the Italian Competition Authority (“ICA”), ascertaining the existence of a cartel among them aimed at influencing tenders made by local public transport companies.

The appellants had challenged this decision claiming that the ICA had erred in reversing the burden of proof of the alleged anti-competitive conduct, requiring the Companies to provide an alternative explanation of the conduct even in the absence of evidence proving the existence of the alleged abusive coordination.

The IAC agreed with the Companies and overturned the decision of the ICA, alleging that the documentary evidence used by the latter were unsuitable to prove the sharing of sensitive information from a competition point of view and that the reasoning of the ICA was not corresponding to the factual findings.

In particular, the IAC pointed out the following shortcomings of the ICA:

  • The absence of important documentation.

  • The presence of more than one apodictic statement.
  • The recourse to the presumption in the absence of serious evidence.
  • The absence of appreciation of the notorious economic difficulties of the sector involved.
  • The negligible market share of the parties.

In light of the above, the IAC argued that the alleged anti-competitive conduct cannot be considered as the only plausible explanation of the Companies’ behaviour, even in terms of a concerted practice, since the relative conduct could have been deemed just as unilateral decisions of the Companies in response to economic inputs of the sector involved.

These IAC judgements continue a trend that shows the close scrutiny that the IAC has over the ICA. Therefore businesses who have been the subject of recent adverse decisions by the ICA should consider obtaining legal advice on the possibility of appealing these cases.

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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Bryan Cave Leighton Paisner

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