EU Commission Alleges Sanrio Used IP Rights to Partition EU Single Market
Selective Distribution: General Contract Law to the Rescue of Rejected Distributor
FCO Remedies Practice Codified in New German Merger Remedies Guidance
Possible Wider UK Powers to Block Foreign Acquisitions
"Lead Surcharge" Fine Short Circuits German Industrial Battery Manufacturers'
Italian Heating Sector Feels the Chill
EU Commission Alleges Sanrio Used IP Rights to Partition EU Single Market
On 14 June 2017, the EU Commission announced that it was opening an investigation into Sanrio, owner of the Hello Kitty brand. Sanrio have been accused by the Commission of an infringement of Article 101 TFEU, the prohibition of anti-competitive agreements. The infringement relates to Sanrio's use of the Hello Kitty brand on products. The Commission is investigating whether the company breached EU competition rules by restricting their licensees' ability to sell licensed merchandise cross-border and online through the use of their intellectual property rights.
The investigation follows the conclusion of the e-commerce sector enquiry by the Commission in May this year. We have previously commented how the conclusion of that enquiry was fairly unique in that it did not recommend any policy or legislative change. Instead, it rather acted as a successful fishing expedition for the Commission to amass evidence of potential corporate liability. That in itself seems to be the growing policy of the Commission; enforcement first. Perhaps the Commission believes the strongest way of changing com-pany behaviour is to keep targeting individual companies with investigations to reinforce the law and change negative behavioural norms.
Selective Distribution: General Contract Law to the Rescue of Rejected Distributor
[co-author: Emmanuelle Mercier]
On 24 May 2017, the Paris Court of Appeals ruled against FCA France (Fiat Chrysler Group), owner of the selective distribution network of the brands Jeep and Lancia, for breach of the general French contract law obligation to negotiate in good faith in the selection of its authorized distributors.
The claimant, a car dealership, had been distributing Chrysler, Jeep and Dodge since 2001. The distribution network was initially owned by Chrysler France, which experienced financial difficulties and sold its business to FCA France, effective as from May 2010, and terminated all of its distribution agreements entered into with car dealerships, effective as from May 2011.
In May 2010, FCA France invited the outgoing Chrysler, Jeep and Dodge distributors to apply to become dealers of the Lancia and Jeep brands, intended to replace the distribution of Chrysler, Jeep and Dodge brands. FCA France indicated that the selection would be made based on six criteria relating to each candidate's experience representing the relevant brands, and the plans regarding the distribution of the new brand Lancia.
The claimant applied to join this selective distribution network in July 2010 and was notified in January 2011 that its application was not successful and that another dealership based in the same area had been selected. The reasons given by FCA France for not authorizing the claimant as a distributor were that the dealership did not meet the requirements of the six aforementioned criteria, as well as a decrease in the dealer's past performance in distributing Chrysler, Jeep and Dodge, resulting in a "loss of confidence".
The car dealership sued FCA France for wrongful refusal before the Paris Commercial Court, which nonetheless ruled that the authorization refusal by FCA France was perfectly legitimate. The Paris Court of Appeals overturned this ruling on appeal. Although the Paris Court of Appeals agreed that refusing to select a given candidate as an authorized distributor in a selective network did not constitute a "hard-core" restriction on competition and was exempted under EU block exemption regulation no. 1400/2002 on motor vehicle distribution, which was in effect at the time, the Court considered that FCA France had breached its obligation to negotiate in good faith. According to the Court of Appeals, under such obligation, FCA France should have justified its refusal to authorize the car dealership as a distributor based on the criteria it had established itself, and by providing details and figures to support its decision.
Thus, FCA France was found not to have sufficiently justified its refusal, confirmed by the fact that the other dealership which was selected had not met the criteria either. The selection was found to be discriminatory, as the actual, undisclosed, reason for not selecting the dealership was a past litigation with Chrysler.
FCA France was held liable to pay over 250,000 euros in damages to the dealership for wrongful refusal to authorize it as a distributor and late notification of the refusal, which was notified six months after the dealership's application, a delay that the Court found was not justified as the dealership's application had clearly not been subject to a thorough analysis.
It is interesting to note that the Paris Court of Appeals based its decision on the French law obligation not only to perform agreements in good faith, a longstanding provision of the Civil Code (Article 1134), but also on the obligation to negotiate in good faith, which was introduced explicitly in the Civil Code only last October 2016.
Decision: Paris Court of Appeals, 24 May 2017, no. 15/12129
FCO Remedies Practice Codified in New German Merger Remedies Guidance
On May 30, 2017, The Bundeskartellamt released a note entailing a comprehensive overview and summary of the Federal Cartel Offices (FCOs) standing remedies practice, as well as of related jurisprudence. The Guidance Document on Merger Remedies serves to bolster transparency in the merger control process and enable companies and their lawyers to assess their individual situations and rectify any identified impediments to competition that may prevent merger clearance. Furthermore, it contains explicit criteria used as the basis for assessment, outlines the procedure for the proposal, the implementation of remedies, and the tasks of trustees, which often play an important role in the implementation of remedies. The core elements of the document are listed below.
As an important instrument in merger control practice, divestiture remedies are often the best way to prevent a reduction in competition and are clearly preferred by the FCO. The guidelines elucidate that while German law allows only structural remedies, behavioral remedies can be administered if they are of structural nature. Furthermore, the guidelines allude to behavioral remedies that have been accepted in Germany in individual cases in the past, but distinguish these cases from instances where the FCO (and courts) have rejected remedies that create "Chinese walls", shutdown of capacity, or limit the exercise of corporate influence. In comparison to EU legislation, German law expressly disallows obligations that mandate the FCO to continuously control the conduct of the parties post-proceedings. This concept has significant bearing on Germany as it may provide grounds for appeal against clearance with commitments.
From the outset, an up-front-buyer solution is available to prevent any negative effects of the merger on competition, and the guidelines clarify that this solution requires not only entering into a binding agreement with a buyer (approved by the FCO), but also having completed the divestiture (including transfer of owner-ship) prior to closing of the merger, per German law. This can be distinguished from the European Commission's practice, where a binding agreement with an authorized buyer is rendered sufficient.
Furthermore, the guidelines deal with fix-it-first solutions. If the viability of a divestiture is not clear, the guidelines state that it may be helpful to enter into a binding divestiture agreement during the merger proceedings. There is generally no need for the FCO to separately approve the buyer. However, the FCO's position toward fix-it-first solutions is starkly different than the EU approach, in which fix-it-first solutions are a rather welcomed practice in order to obtain clearance in complex scenarios.
Finally, distinguishing the EU practice, the guidelines affirm that the FCO cannot clear mergers subject to phase I proceedings, only phase II proceedings. Merging parties are prompted to submit commitments.
The parties' offering of such commitments extends the regulatory deadline in phase II by one month (to four months in total). The guidelines acknowledge that in many cases such extension is not sufficient to conduct a requisite market test, which may result in the need for additional investigation. Thus, the guidelines make explicit reference to the possibility to further extend the deadline with the parties' consent.
In terms of the requirements for commitments, the guidelines refer to the existing model divestiture texts and confirm that the merging parties must identify any deviation from the model texts and explain the reasons for this deviation. In addition, the guidelines also point out that following a first proposal by the parties, the FCO may provide a "cornerstone paper", substantiating requirements for appropriate commitments and their respective implementation.
Possible Wider UK Powers to Block Foreign Acquisitions
Recent developments show the UK Government's desire to expand their powers to block foreign takeovers. We explore the nature and scope of the proposed legislation and assess its likely consequences.
The Conservative Government recently announced a deal with the Democratic Unionist Party to provide it with an overall Parliamentary majority. The present Administration is therefore expected to stay in power for the foreseeable future and it is likely to be able to force through some relatively uncontroversial legislation in the current session. However, many of the more contentious Conservative Government manifesto pledges in relation to education and healthcare have now been quietly dropped.
Where does this leave the Conservatives' manifesto pledge to force more public interest concerns into the consideration of mergers? More specifically, will there be particular scrutiny of mergers in the telecoms, defence and energy sectors on wider national interest grounds than at present? The Manifesto alarmed business commentators and regulators by proposing what seemed a possible extension of the merger control regime to expand ministerial control of "telecoms, defence and energy". This would alter the current position whereby the competition test is the only test for clearing transactions except for in some limited exceptions. Those exceptions are cases involving national security, plurality and quality in the media, and the stability of the UK financial system.
As yet it is unclear the extent of the Government's ambitions in this regard. Only when draft legislation sees the light of day will things become clearer. Is a return of a public interest test in UK merger control on the cards and if so, how will it differ from the present system? Alternatively is the Government preparing to introduce a UK equivalent of CFIUS to vet some types of foreign acquisitions?
We believe the latter is more likely. Contacts in the Competition & Markets Authority (CMA) before the election indicated that the Government has plans to create a UK version of the US CFIUS system. As many readers will know CFIUS stands for ‘Committee on Foreign Investment in the United States', and is the US foreign investment control regime, sitting alongside the US merger control regime. The US merger control regime is an evidence based assessment of competitive effect on competition-only grounds rather than being based on political determinations. CFIUS on the other hand is more political in nature and concerned with the need to stop technology and control of strategically important businesses being transferred to countries not aligned to the US or otherwise sanctioned. The idea is to prohibit investments and takeovers that harm US national interests.
The UK Prime Minister, Theresa May, and her colleagues have repeatedly stated their desire to have more political control over foreign takeovers and to protect national interests. Theirs is a sense that this is not just a military and national security issue (as powers exist for intervention on these issues under the Enterprise Act 2002 ((EA 2002)) already), but rather it is about protecting fledging UK companies from acquisitions as well as the jobs and value these companies bring to the UK economy. Therefore their desire could extend as far as blocking some foreign mergers altogether through whatever system is put in place to regulate these types of transactions.
To date, we understand the CMA have consulted with the UK Government and advocated to keep any proposed UK regime separate to the antitrust merger control regime, mimicking the US model. The UK CFIUS alternative could therefore be run separately from the CMA by for example the Government Department of Business, Energy & Industrial Strategy (BEIS).
The two key questions for any future UK system are: first, is it necessary, and second, will investment to the UK be dampened as a result? With regard to the former, it is arguable that sufficient regulatory powers already exist to cover national security under the EA 2002 whilst the UK Takeover Code already allows binding post-offer undertakings by the acquirer in public companies, including as to jobs and assets remaining in the UK post-acquisition. The current Conservative Government in fact gave its public support to the acquisition of British chipmaker ARM by Japanese company Softbank. Softbank had given, under the Takeover Code, a 5 year undertaking to double the UK workforce, as well as keeping ARM's headquarters in the UK.
The wider question of whether such measures might deter investment is hard to answer as the investment environment consists of variables such as taxation, which could easily be altered alongside any changes to foreign investment in the UK. However, any overtly political future actions such as trying to safeguard large UK pharmaceutical firms from acquisition would be a slippery slope to protectionism, especially if the CMA had already cleared the merger on competition grounds. The slope could become slipperier still should the Government expand the number of sectors under protection in its new industrial strategy to also include prized sectors such as automotive technology and parts suppliers.
The recent Queen's Speech, which lays out the Government's upcoming legislative agenda, did not elaborate on this area of merger control and the industrial strategy in much detail, except to say that 'critical infrastructure' would be protected for national security purposes, without elaborating on how. This has been widely interpreted to refer to civil nuclear power stations and associated infrastructure, after the controversy at the Hinkley Point site. There, the presence of a Chinese minority investor in the site raised concerns about national security and the influence the company could then bring on the Government and UK energy industry.
Given the way it was expressed in the Queen's Speech, perhaps the UK CFIUS regime will be limited to critical infrastructure (but could this include rail?). Businesses and the CMA may be breathing a sigh of relief if this is the extent of it. It would be particularly welcomed if a new system based on political considerations is not being shoehorned into the UK merger control regime. However, given the unpredictability of recent events, nothing much seems certain for now. It could take only one politically unpopular foreign acquisition to tip the balance back the other way.
"Lead Surcharge" Fine Short Circuits German Industrial Battery Manufacturers'
Following an application for leniency by Exide Technologies GmbH, the German Federal Cartel Office (FCO) conducted an industry-wide raid in April 2014. While Exide Technologies will not face any conse-quences, the FCO imposed fines on the other companies involved (Hawker GmbH and Hoppecke Batterien GmbH & Co. KG) of approximately 28 million euros. Both manufacturers of industrial batteries and their representatives agreed on a so called 'lead surcharge' as a key component of their pricing structure.
The 'lead surcharge' is a pricing instrument that allows changes in raw material prices to be automatically included in the final sale price. This allows the adjustment of sale prices without any contractual alterations, causing the price risk of raw materials to shift to the customer. The lead price quotation of the London Metal Exchange is used as a reference for the level of the surcharge. Such a surcharge is in itself permitted and can be contractually agreed upon.
However, the FCO considers it to be unjustifiable for suppliers to harmonize their usage of this instrument amongst each other, especially to introduce or maintain such a surcharge across the industry as a standard. The companies involved decided on introducing the lead surcharge in early 2004 and regularly confirmed this agreement in association meetings. They did, however, not agree on the detailed method of calculation or the exact level of the surcharge.
In addition, during the period from 11 September 2012 to 18 March 2014, the aforementioned companies agreed to shift the increased costs of lead and lead alloy regarding the distribution of motive power batteries to the customers. This arrangement was confirmed and renewed during both confidential discussions and association meetings.
The proceedings regarding Hoppecke and Hawker were concluded by means of settlement. The imposition of fines took account of the fact that the company Hoppecke had comprehensively cooperated in the clarification of the agreements with the FCO. The proceedings against three other involved companies were not continued, as both their contribution to the infringement as well as their market power was considered to be significantly low in comparison to the sanctioned companies. While the fines imposed on Hoppecke are final, Hawker can still appeal to the Higher Regional Court.
Italian Heating Sector Feels the Chill
The Italian Competition Authority (ICA) has opened an in-depth investigation into Cadel s.r.l. (Cadel), an Italian company owned by MCZ Group S.p.A. (one of the main operators in the heating sector), producing pellet stoves and wood burning heaters.
The investigation started after the complaint of an online distributor selling Cadels' products. It is alleged that, in particular, Cadel:
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imposed minimum resale prices on its distributors;
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asked them to limit the sale of products to within Italy; and
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hindered the distributors' ability to promote the online selling of Cadel's products.
ICA also alleged that the above behaviour was not mitigated by any pro-competitive justification.
In its Statement of Objections, the ICA alleged that such conduct was an unlawful infringement of Article 101 of the Treaty on the Functioning of the European Union because it would discourage the expansion of distributors' activity beyond a certain geographic area and would prevent foreign consumers from purchasing Cadels' products sold online by Italian distributors.
The investigation continues.
[View source.]
