European Competition Law Newsletter – August 2021

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Table of Contents

  • UK Supreme Court Upholds Noncompete Clause as Reasonable and Enforceable
  • Commission Reveals Proposed Shape of New EU Rules on Vertical Agreements
  • UK Fines for Excessive Pricing and Payments Not to Compete
  • UK to Move Forward With Post-Brexit Competition Law Reforms

UK Supreme Court Upholds Noncompete Clause as Reasonable and Enforceable

On 23 July 2021, the UK Supreme Court (UKSC) ruled on the validity of a noncompete clause in a nondisclosure agreement (NDA). The NDA had been agreed between two law firms and the noncompete restricted one of the firms (Firm B) from taking part in particular litigation without the other’s (Firm A) permission.

Firm A had issued a group claim against a defendant and approached Firm B, a firm that had more experience of undertaking group actions, to propose collaborating on the litigation. Firm A sent a draft NDA to Firm B and this was signed by Firm B. The NDA included a noncompete clause through which Firm B undertook, for a period of six years, "not to accept instructions for or to act on behalf of any other group of claimants in the contemplated group action" without Firm A’s permission. The two firms embarked upon an informal collaboration, though no formal collaboration agreement was ever reached.

During the course of this informal collaboration, Firm B recruited claimants for its own group action and then issued its own claim form. It later agreed with a third law firm to work together in the litigation. Firm A then contacted Firm B asserting that Firm B’s actions were in breach of the noncompete clause. The High Court found that the noncompete clause was enforceable and granted an injunction requiring Firm B to cease acting in the litigation for six years. The Court of Appeal allowed Firm B’s appeal and held that the noncompete clause was unenforceable. Firm A therefore appealed to the UKSC.

The parties agreed before the UKSC that the noncompete clause amounted to a restraint of trade. The issue was whether it was reasonable. This means it must be both (i) reasonable between the parties and (ii) not contrary to the public interest. To be reasonable between the parties, it must protect the legitimate interests of the party seeking its protection and go no further than is reasonably necessary to protect those legitimate interests.

The critical question on (i) was whether Firm A’s legitimate interests were limited to those expressly set out in the NDA. The UKSC held that this was not the case. The fact that the two firms intended or contemplated a process of informal collaboration could be considered even though the NDA did not include any obligation to do so. Firm A had a legitimate interest in protecting its own proposed group claim from Firm B setting up a rival group claim. The noncompete clause was reasonably necessary to protect those legitimate interests. It was logical and necessary that it should last for a six-year period, as that roughly equated to the relevant limitation period. The noncompete clause was therefore reasonable between the parties. As for (ii), the noncompete clause was not unreasonable as being contrary to the public interest.

Given that, prior to 2019, the UKSC had not decided a case on the restraint-of-trade doctrine for 45 years, it is remarkable that this is the third case in three years in which it has considered the restraint-of-trade doctrine. Egon Zehnder Ltd v Tillman [2019] UKSC 32; [2020] AC 154 explored the power to sever the offending restraint-of-trade clause from the rest of the contract, and a previously leading case, Attwood v Lamont [1920] 3 KB 571, was overruled. In Peninsula Securities Ltd v Dunnes Stores Ltd (Bangor) [2020] UKSC 36; [2020] 3 WLR 521, the court examined what Lord Wilson described, at para 1, as the “outer reaches” of the restraint-of-trade doctrine. It was held that a restrictive covenant over land, given by a developer of a shopping centre, preventing there being a rival shop to that of the claimant (who was an “anchor tenant”) did not give rise to a restraint of trade. These cases show that the common law restraint-of-trade doctrine remains important and will often need to be considered alongside competition law when analysing the enforceability of a particular provision.

Commission Reveals Proposed Shape of New EU Rules on Vertical Agreements

The most important day-to-day competition rules for many businesses active in the EU are those relating to vertical agreements such as distribution, franchising, supply and agency. After a long consultation period, on 9 July 2021, the Commission revealed the likely shape of those rules for the next decade and more.

The Commission published a draft revised Vertical Block Exemption Regulation (VBER) and related vertical guidelines. The VBER sets out an automatic exemption from EU competition law for agreements which fall within it. The guidelines provide further detail on the operation of the VBER as well as the application of competition law to agreements that do not fall within the VBER.

Broadly, the proposal would continue the familiar structure and scope of the current VBER. However, notable changes include: the treatment of information exchange in dual distribution situations; the exclusion from the automatic exemption of parity (or most-favoured nation) clauses required by “online intermediation services” (i.e., e-commerce platforms); the disapplication of the VBER to agreements between e-commerce platforms and sellers using the platform, where the platform is itself a retailer competing with those sellers; and separate sections setting out the “hardcore restrictions” (which, if included in an agreement, disapply the application of the VBER to the whole agreement) for exclusive, selective and other types of distribution systems.

The proposed new guidelines address much-debated issues including distributors’ use of marketplaces, direct and indirect restrictions on distributors making online sales, and suppliers’ use of dual pricing.

The proposal would not change the rules on resale price maintenance, but the draft guidelines specifically cover e-commerce platforms setting sellers’ prices and suppliers’ use of “fulfillment arrangements” (under which the supplier agrees on a price with an end customer and the sale is made through an independent dealer).

The proposed new rules would enter into force on 1 June 2022 and expire on 31 May 2034, with a transitional period until 31 May 2023 for agreements in force on 31 May 2022 which comply with the current version of the VBER.

UK Fines for Excessive Pricing and Payments Not to Compete

On 15 July 2021, the UK Competition and Markets Authority (CMA) announced fines of £260 million for UK competition law infringements in relation to the supply of hydrocortisone tablets. The breaches were abuse of dominance through excessive and unfair pricing and market sharing brought about by a payment from one company to two of its would-be competitors to stay out of the market.

The ownership position of the companies involved during the relevant period (and therefore what entities were fined) is complex, and there were also various name changes, but the facts of the breaches are relatively straightforward.

Auden Mckenzie and its economic successor Actavis UK — now Accord-UK — exploited the fact that de-branded drugs are not subject to UK National Health Service (NHS) price regulation. Auden Mckenzie bought the licences for hydrocortisone — becoming the only supplier and therefore in a dominant position — and launched its own generic versions in April 2008. The CMA found that Auden Mckenzie and Actavis UK increased the price of 10mg and 20mg hydrocortisone tablets by over 10,000 percent, compared to the original branded version of the drug sold by the drug’s previous owner prior to April 2008.

Auden Mckenzie also paid pharmaceutical companies Waymade and AMCo (now known as Advanz Pharma) not to enter the market with their own generic versions of hydrocortisone tablets. Waymade was set to enter with 10mg and 20mg versions and AMCo with a 10mg version. In exchange for staying out of the market, Auden Mckenzie paid the companies on a monthly basis — totaling £21 million to AMCo and £1.8 million to Waymade over the duration of the relevant agreements. After taking over sales of hydrocortisone tablets in 2015, Actavis UK continued to pay off AMCo.

The CMA commented that “these are without doubt some of the most serious abuses we have uncovered in recent years , resulting in the NHS “at one point being charged over £80 for a single pack of tablets that had previously cost less than £1.”

The companies may overturn the findings on appeal, but based on publicly available information, it is difficult to understand how this clear anti-competitive behaviour was allowed to develop. The case shows that all companies need continually to update and refresh their competition law compliance efforts, including by ensuring adequate and suitable live training of employees.

UK to Move Forward With Post-Brexit Competition Law Reforms

On 20 July 2021, the UK government announced a consultation titled Reforming Competition and Consumer Policy.” This is its post-Brexit “vision for transforming our competition and consumer policies to make it best in class.”

Separately, on the same day, the government revealed its proposals for the powers of the new UK Digital Markets Unit (DMU) housed within the CMA, which will specifically target large technology companies.

On the competition side, the Reforming Competition and Consumer Policy consultation covers five points:

  • Changes to the market inquiry process, which reviews markets in general and outside specific company-focused investigations of competition law infringements.
  • Changes to the merger control regime, including to the jurisdictional thresholds.
  • Reforms to the CMA’s Panel (the individuals who review phase 2 market and merger inquiries).
  • Stronger enforcement against anti-competitive conduct, including changing the territorial scope of UK competition law.
  • Stronger investigative and enforcement powers across competition tools, including increased powers to obtain information and sanction companies which refuse to cooperate or comply with the CMA’s investigations and remedies.

For most international companies, the jurisdictional proposals in relation to the merger control regime are probably of most interest. The UK merger regime already has a notoriously wide (and uncertain) jurisdictional reach, and at the same time, the CMA is highly interventionist.

Under the proposals, the merger control system would continue to be voluntary and non-suspensory; it would not change to a mandatory notification and suspension regime. However, the jurisdictional thresholds would be changed.

The “turnover test” would require the target’s UK revenue to exceed £100 million instead of £70 million. The alternative “share of supply” test would be expanded to cover cases in which either party has both a share of supply in the UK of at least 25 percent and a UK revenue of at least £100 million (in addition to the current coverage of cases where the transaction would result in the creation or enhancement of at least a 25 percent share of supply in the UK, which requires an overlap). However, there would be a new de minimis exemption applying in all cases where the worldwide turnover of each of the merging entities is less than £10 million.

The separate proposals for the DMU are based on the disputed assumption that “the unprecedented concentration of power amongst a small number of digital firms is holding back innovation and growth.” To deal with this apparent issue, the DMU would be given the power to designate tech firms that hold “substantial and entrenched market power” with “Strategic Market Status” (SMS). This would require them to follow new rules of “acceptable” behaviour with competitors and customers. The consultation seeks views on the objectives and powers of the DMU and details a new mandatory code of conduct, which would set out what is expected of these firms.

The code would be underpinned by investigation and enforcement powers, perhaps including the ability to impose fines of a maximum of 10 percent of a firm’s turnover for the most serious breaches. The DMU could also be given powers to suspend, block and reverse code-breaching behaviour and order the companies to take specific actions to comply with the code.

The DMU may also be able to implement measures to support interoperability, such as requiring platforms to allow the public to share contacts from one platform to another. Finally, the government will also consider whether to give the CMA greater powers to scrutinise and intervene in mergers involving SMS firms, for example, by requiring them to report on their takeovers.

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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