This newsletter is our take on the antitrust developments we think are most interesting to your business. John Roberti, partner based in Washington, D.C., is our editor this month. He has selected:
The five-year plan for the European Commission is underway. January has seen the new European Commissioners, led by former German defence minister Ursula von der Leyen, start to work on their ambitious agenda. The three Executive Vice-Presidents – Frans Timmermans, Margrethe Vestager and Valdis Dombrovskis – have particularly challenging portfolios, both chairing a Commissioners’ group on one of the Commission’s priority projects, and also managing a policy area and heading up the underlying Directorate-General(s). In this opinion piece we provide an overview of the new Commission (which goes some way toward achieving gender, geographic and political balance), a summary of what we can expect from Vestager on antitrust and the digital economy and a short appraisal of the recently-appointed Director-General of DG Comp, Olivier Guersent.
The U.S. has new guidance on how the antitrust agencies will evaluate vertical mergers. The U.S. Federal Trade Commission (FTC) and Department of Justice (DOJ)’s Antitrust Division have published long-awaited draft 2020 Vertical Merger Guidelines for public comment. The guidelines outline the agencies’ principal analytical techniques, practices and enforcement policy for vertical mergers (those combining two or more companies operating at different levels in the same supply chain). Although the majority of vertical mergers are competitively benign or even beneficial, antitrust authorities worldwide, the U.S. agencies included, are challenging an increasing number as raising antitrust concerns. The agencies themselves admit that their vertical merger policy and actual practice has evolved substantially since the current guidelines were issued in 1984.
But does the new draft provide sufficient transparency and clarity? The draft guidelines do now helpfully detail in one place the anti-competitive harms relevant to vertical merger analysis (including foreclosure, raising rivals’ costs and access to competitively sensitive information). The guidelines also list some of the other key considerations, including how the elimination of double marginalization may mitigate or even offset anti-competitive effects. (Double marginalization means that two independent firms must earn a margin and therefore inefficiencies are created; eliminating double marginalization may be colloquially similar to “eliminating the middle man”.) In addition, the guidelines describe the efficiencies that the agencies consider. Hypothetical examples are given, with an explanation of why they would or would not raise concerns. Notably, two Democratic FTC Commissioners abstained from the vote to approve the draft guidelines, both expressing concerns that the guidelines are not aggressive enough and one expressing discomfort at the inclusion of a 20% market share “safe harbour”. A period of public comment will follow and the final draft is expected to be published later this year. The consultation is open until 11 February 2020. The American Bar Association (ABA) Antitrust Law Section held a podcast, hosted by A&O’s John Roberti, discussing the vertical merger guidelines, which can be found here, or via the ABA’s Our Curious Amalgam podcast.
The U.S. Federal Trade Commission (FTC) has announced increases to the notification thresholds under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act. The new changes, which will apply to all transactions that close on or after February 27, 2020, require notification to the FTC and the Antitrust Division of the U.S. Department of Justice of transactions over USD94m, and contain updated levels for additional statutory thresholds. The FTC is required to revise the thresholds annually based on the change in gross national product. For more details, please see our client alert which you can find here.
Early this month the Chinese antitrust authority, SAMR, published for consultation proposals to amend China’s 2008 Anti-Monopoly Law as well as a draft new merger regulation. If adopted, the changes will crystallise many current SAMR practices but they could also have a far-reaching impact on merger control and antitrust investigations in the country. The following take aways give a flavour of what the future could hold.
On merger control:
- Significantly increased fines for failure to file and gun-jumping – SAMR currently regularly fines companies towards the upper limit of its RMB500,000 (approx. USD72,000) cap and would like to see the maximum possible penalty increased to 10% of the infringer’s turnover.
- A clear indication that SAMR may in future investigate transactions falling below the notification thresholds if they restrict competition in the market.
- Introduction of stop-the-clock powers – while welcome in theory as it should give SAMR more time to review complex deals (in practice it has rarely managed to conclude reviews of complex transactions within the maximum statutory timeframe of 180 calendar days), in practice it could introduce significant timing uncertainty if clear limitations are not baked into the mechanism.
On antitrust:
- Potential introduction of personal liability and criminal sanctions.
- Substantially increased fines for antitrust infringements by parties that had no sales revenue during the last financial year or for entering into monopoly agreements that have not been implemented (from RMB500,000 to RMB50m (approx. USD7.2m)), and for antitrust infringement by trade associations (from RMB500,000 to RMB5m (approx. USD720,000)).
- Increased fines for obstructing investigations – currently capped at RMB1m, the fines could increase to an amount up to 1% of the infringer’s turnover.
New antitrust rules published by the German economy ministry will provide the German antitrust authority with increased powers. Several months after they were originally put together, the latest draft reforms to Germany’s antitrust rules have finally been published by the German economy ministry. In an accompanying press release economy minister Peter Altmaier notes the new rules, apart from transposing the ECN+ directive, aim to give the German Federal Cartel Office (FCO) increased powers to act more quickly and prevent abuse of dominance. Many of the amendments focus on improving antitrust enforcement in the fast-moving digital economy, and include some of the suggestions coming out of the report on digital markets by the Commission of Experts on Competition Law 4.0 (for more on this see our September edition of Antitrust in focus). In particular, ‘intermediary power’ is included as a new factor for defining market dominance, aimed at market dominant intermediaries in platform markets. The reforms also add a new head of ‘abuse’, enabling the FCO to identify companies operating in platform markets which have a significant cross-market impact on competition and which are not yet dominant, but where the FCO sees a risk of the market 'tipping', and to prohibit various practices by these companies – this includes treating their own services more favourably than those of rivals, using data gathered in a market in which they are dominant to restrict competition in other markets, or hindering the interoperability of products and services or data portability. And the new rules attempt to improve access to data, clarifying that data can constitute an ‘essential facility’.
In addition, the draft proposes lowering the bar for interim measures, to enable the FCO to better react to suspected breaches as quickly as possible. This fits with a broader push for antitrust authorities to make greater use of interim measures – the European Commission imposed them for the first time in 20 years against Broadcom last year and authorities in other Member States are stepping up their use of the tool (the Belgian authority has imposed interim measures twice in the past month, against a bumper pool association and a telecoms joint venture).
Other key changes in the draft include increased merger control thresholds, raising the domestic turnover threshold from EUR5m to EUR10m. This aims to reduce the number of notifications by 20%, easing the burden on both merging parties – specifically medium-sized entities – and the FCO. By contrast, the draft also proposes to allow the imposition of a three-year mandatory notification obligation on companies with a worldwide turnover of over EUR250m if there is an indication that the firm’s future transactions could affect competition in certain defined markets (to kick in where the target’s turnover exceeds EUR2m and two thirds of its turnover is generated in Germany), a step to try and bring a series of smaller (below threshold) deals based on a long term strategy within the scope of the FCO’s review. In addition, the draft sets out an increase (from EUR15m to EUR20m) in the volume market threshold of the de minimis market provision, and stretches the period for an in-depth merger review from four to five months. In antitrust cases, greater fining powers are on the table, including for associations involved in antitrust infringements and for procedural breaches (eg obstructing a review or not responding to an information request). All in all, the reforms are wide-ranging and significant. If adopted, they will push forward the German government and FCO’s vision for tougher enforcement in the digital sector. The draft now is subject to further review by the German government and the reforms are expected to take effect before the end of the transposition deadline of the ECN+ in February 2021.
The French antitrust authority has dismissed any lingering argument – based on the important Continental Can judgment – that a deal falling below merger control thresholds could amount to an abuse of dominance, shedding some much-needed light on a grey area of antitrust law in the EU. In 2016 France’s former state-owned incumbent broadcaster, Télédiffusion de France (TDF), acquired Itas Tim. It was a 3-to-2 merger, leaving TDF and Towercast as the only players in the digital terrestrial television (DTT) sector, but did not meet the EU or French merger control notification thresholds. Towercast complained to the French authority, claiming that the acquisition was abusive as it reinforced TDF’s dominant position on both the upstream and downstream wholesale DTT markets. It relied on the European Court of Justice’s 1973 ruling in Continental Can – confirming that it was possible to apply the abuse of dominance prohibition to mergers when a company used a concentration to strengthen its dominant position to hinder competition – to support that argument. The French authority disagreed. In dismissing the complaint this month, it noted that Continental Can predated the introduction of the EU’s mandatory suspensory merger control regime in 1989, which was meant to distinguish between acquisitions and anti-competitive behaviour, and is therefore obsolete. In addition, the authority found that case law and decision-making practice relating to the national rules points to merger control and abuse of dominance being distinct areas of law.
The case provides fuel to the French authority’s desire for an ex-post merger control regime that would allow it to review transactions falling below the national turnover thresholds, including so-called ‘killer acquisitions’. The authority has certainly not hesitated to sanction TDF in the past when it has considered it legitimate to act. (Previous fines on TDF include EUR4.2m in February 2015 for abusing its dominant position with respect to reference information needed by rivals to compete in procurements in French overseas territories, EUR5.66m in June 2015 for practices foreclosing competition at the Eiffel Tower and EUR20.6m in June 2016 for abusing its dominant position in the DTT broadcasting market.) Interestingly, the authority’s decision can be clearly distinguished from the position on the other side of the Atlantic. In the U.S., both the Federal Trade Commission (FTC) and the Department of Justice have the power to challenge transactions that do not meet notification thresholds. But we have also seen them investigate deals for violating anti-monopolisation law under section 2 of the Sherman Act. Just last month, for example, the FTC sued to block Illumina’s subsequently abandoned proposed acquisition of Pacific Biosciences under both section 2 and merger control law (for more on this case, see below).
The UK’s Competition and Markets Authority (CMA) has marked the start of 2020 with its first-ever fine for failure to comply with an information notice under its market studies regime. This development follows last year’s ramped up enforcement of procedural breaches of the UK’s merger control regime.
The CMA launched a market study into online platforms and digital advertising in July 2019. In order to meet statutory deadlines, the CMA used its power to issue notices requiring companies to provide documents and information to assist its investigation. Despite multiple warnings from the CMA, AppNexus submitted a partial response to a notice three weeks beyond an already extended deadline, and provided further substantial parts of its response over ten weeks late. The CMA imposed a GBP20,000 penalty. AppNexus’ parent company, AT&T, was able to mitigate the fine, which could have reached a statutory maximum of GBP30,000 and, after taking over responsibility for co-ordinating AppNexus’ response, issued an apology and quickly resolved the outstanding information requests. The CMA did not find that a host of resourcing issues (including the need to respond to similar questionnaires from other authorities, the fact that key stakeholders were located in the U.S. and that it was the holiday season) were a reasonable excuse for the failure to comply. The CMA also determined that AppNexus had displayed a “negligent attitude” and that this attitude had an adverse impact on its probe. The CMA described the administrative penalty as “critical to achieve deterrence” both in this specific case and more widely for those subject to future investigatory requirements.
The Spanish antitrust authority (CNMC) had an active year in 2019, and took on a number of new issues. For the first time it considered that findings of cartel infringement could automatically result in the companies involved being debarred from procurement processes, referring three cases to the Spanish Public Procurement Board to decide the scope and duration of the debarment. It issued landmark decisions relating to anti-competitive information exchange and the criteria for considering a trade association’s code of conduct to restrict competition. The CNMC also confirmed its willingness to fine directors involved in cartel practices. In mergers, behavioural commitments were in favour, and the authority looked closely at whether an acquirer’s non-controlling minority stake in a competitor of the target could give rise to antitrust concerns. For more on these trends, as well as an insight into the challenges faced by the CNMC going into 2020, see our alert.
A Chilean court recently revoked immunity for a company that was the first to report a cartel, but that turned out to be the ringleader of the cartel which forced others to join. Leniency regimes are an important element of most antitrust authorities’ enforcement armoury. They encourage companies to blow the whistle on a cartel in return for complete immunity or a reduction in fine. However, full immunity from fines tends not to be available to companies that are found to have acted as ringleaders or coerced another undertaking into joining the cartel, or remaining in it. Under the EU and UK regimes, for example, a coercer could only qualify for a fine reduction, even if it is the first to report a cartel. However, there have been few cases on what substantively amounts to coercion. This month, a court case confirmed that coercion is a block to immunity in Chile and also added some colour as to what might be considered coercive behaviour.
In 2015 the competition tribunal granted Chilean pulp and paper company CMPC full immunity as the first leniency applicant to report a tissue cartel. Rival SCA, which received a discounted USD15.5m fine as the second leniency applicant, appealed the tribunal’s decision to the Supreme Court. SCA argued that it should have benefited from full immunity because CMPC, the dominant player in the market, had organised the cartel and coerced SCA into joining through threats of an exclusionary price war. The Supreme Court agreed to an extent. It found that the scope of coercion should be extended beyond the threat of physical violence to include economic threats, and that with a 75% share of the Chilean paper products market CMPC’s price war threat was credible. It therefore withdrew CMPC’s immunity and imposed a USD15.5m fine. However, the court did not consider that SCA qualified for immunity in CMPC’s place since it had only confessed to participating in the cartel and had not revealed the cartel’s existence.
In a remarkable development, a company whose consummated merger was being investigated and potentially challenged has sued the U.S. Federal Trade Commission (FTC), alleging that the FTC’s administrative proceedings violate the U.S. Constitution. Both the FTC and the Department of Justice (DOJ) have the power to challenge transactions that do not meet the U.S. merger notification thresholds. And they regularly investigate relatively small completed mergers for review. Most recently, the FTC issued an administrative complaint challenging and seeking to unwind Axon’s acquisition of VieVu which completed back in May 2018. The FTC alleges that the combination of the leading supplier of body-worn camera systems with its closest competitor “eliminated direct and substantial competition in price and innovation” and has allowed Axon to substantially increase prices – in particular in contracts serving large metropolitan police departments – and to stop the development of new VieVu products. The FTC has also taken issue with ancillary long-term agreements. These prohibit VieVu’s former parent company from competing with any Axon product and limit solicitation of customers and employees by either company. Some of the restraints are set to last for more than 10 years.
Axon is putting up a fight. On the same day as the FTC’s complaint, Axon sued the agency in an Arizona federal court, alleging the FTC’s administrative proceedings violate the U.S. constitution’s due-process clause. Noting that the DOJ is required to take merger cases straight to federal court, it disputes FTC commissioners’ ability to bring in-house cases and then overturn on appeal decisions made by the FTC’s administrative law judge. Axon has also filed for a preliminary injunction to temporarily block the FTC’s lawsuit. The administrative trial is otherwise due to start in May 2020.
A case early this year is a timely reminder of an expensive consequence of breaking antitrust laws in the U.S.: treble damages. Taiwan-based Quanta is on the hook for a USD438.65m pay-out to HP. In October 2019 a Texas federal court jury found that Quanta had intentionally participated in a scheme to fix the price of optical disk drives and awarded HP USD176m. HP then requested triple damages, arguing that they are mandatory under the Clayton Antitrust Act. The U.S. District Judge agreed, noting that trebled antitrust damages are designed to compensate the injured party – they don’t serve as a punishment and don’t violate due process. The final award total was reduced simply to take account of HP’s settlements with Quanta’s co-conspirators. It will not be lost on Quanta that, by 2017 and prior to trial, all the other optical disk drive manufacturers sued by HP in 2013 had entered into confidential settlements. This case underscores the risk of being the last defendant in a cartel to settle in the U.S., where joint and several liability and treble damages can present daunting liability. (The full text of the District Court judgment is not currently publicly available.)
Hot off the press: a European Court of Justice ruling which clarifies when a patent settlement (‘pay for delay’) agreement can infringe EU antitrust rules. We will include more on this case in the next edition of Antitrust in focus.
Illumina’s now-terminated anticipated takeover of PacBio demonstrates the increasing focus in global merger control enforcement on transactions involving nascent competition. The deal had been struggling through merger control review in both the UK and the U.S. for many months. Both companies are global suppliers of Next-Generation DNA sequencing systems, which are vital in disease research and drug development. It’s a dynamic and rapidly developing sector where innovation is key. The UK Competition and Markets Authority (CMA) and the U.S. Federal Trade Commission (FTC), which co-operated closely throughout their respective investigations, inevitably undertook a forward-looking assessment of the deal. And, in October 2019, the CMA provisionally concluded that it should be blocked. After an in-depth investigation, the CMA found that the transaction would result in a significant loss of competition between the two companies, with few alternative providers of DNA sequencing systems remaining. It also feared that the loss of PacBio as an independent competitor would reduce overall levels of innovation in the market. Given the dynamic context, the CMA placed much weight on the parties’ internal documents which consistently showed that they regularly track each other and adapt their strategies to reflect each other’s developments – all pointing to the firms seeing each other as important competitive threats at both a day-to-day and a strategic level.
An FTC challenge followed in December 2019. The U.S. agency charged that the proposed merger would likely eliminate nascent competition in the U.S. market and allow Illumina to maintain its monopoly. Like the CMA, it also feared a reduction in the combined firm’s incentive to innovate and develop new products. The FTC also authorised staff to seek a temporary restraining order and a preliminary injunction in federal court, if necessary, to maintain the status quo pending the administrative proceeding. In light of these significant regulatory hurdles and a very uncertain outcome, the companies have decided to abandon the deal, with Illumina paying PacBio a USD98m termination fee.
The U.S. Department of Justice (DOJ) regularly indicts foreign nationals, even if they cannot be extradited. When this happens, the U.S. will place a request with Interpol to extradite the national. As long as the foreign national does not cross into a country with an extradition treaty with the U.S., the foreign national likely will not face the charges. However, a case this month shows that making that choice comes with an increasingly severe restriction on global travel. Maria Christina Ullings, a Dutch national and former sales and marketing executive of air cargo carrier Martinair Holland, was extradited from Italy after a September 2010 indictment for participating in a worldwide conspiracy to fix air cargo prices. A fugitive for nearly ten years, with an Interpol Red Notice on her head, she was arrested by Italian authorities in July 2019 while visiting Sicily. She initially contested extradition but waived her appeal after an Italian court ruled against her. She has now entered a guilty plea before a U.S. court and will serve a 14-month stint in jail – with credit for time spent in Italian custody before extradition – and pay a USD20,000 fine.
Department of Justice (DOJ) Assistant Attorney General Makan Delrahim notes that the case demonstrates that “those who violate U.S. antitrust laws and seek to evade justice will find no place to hide”. The net on similar fugitives is clearly closing. Italy is now the seventh country to extradite a defendant in an Antitrust Division case (the others being the UK, Israel, Germany, Canada, Bulgaria and Spain) and the second based solely on an antitrust charge. In 2014 the German authorities extradited Italian Romano Pisciotti, who had been charged with fixing prices of marine hose, when he travelled through Germany. He then pleaded guilty, paid a USD50,000 fine and served two years in a U.S. federal prison. Given the mounting threat of extradition, we may see more individuals opting to negotiate a plea agreement or defend the charges in a U.S. court. The DOJ is also extremely satisfied with its enforcement tally in its air cargo investigation. Some 22 airlines and 21 executives have been charged, more than USD1.8bn in criminal fines imposed and seven executives sentenced to serve prison time.
