Update: competition

Despite continued global economic problems, there has been no let up in competition enforcement with a number of large fines being imposed by both the European and UK authorities in recent months, and the OFT also looking to increase the threat of disqualification for directors responsible for competition law infringements.

At the EC level, in addition to the ongoing review of vertical agreements block exemption and guidelines, the last few months have seen developments in a number of sector-specific workstreams, with publication of the pharmaceuticals sector inquiry report and reviews of existing block exemptions covering the liner shipping, motor vehicle and insurance sectors.

Disqualification of directors

Since 2003, the UK courts have had the power to disqualify a director, for a period of up to 15 years, where the company of which they are a director commits a breach of competition law and the court considers that he/she is unfit to be involved in the management of a company.

The OFT has the power to apply to the courts for such an order (known as a competition disqualification order or CDO) to be made against a director; however, it has never used this power. The only incident of directors being disqualified by UK courts for a competition law infringement was in the Marine Hose cartel case (two directors being disqualified for seven years and another for five years) but that did not result from an application by the OFT.

The OFT is now looking to step up the use of its powers to apply for CDOs, and is currently consulting on a number of proposed changes to its guidelines on the circumstances in which it will do so. Under the existing guidelines, the greater the involvement of the director in the breach, the more likely the OFT is to apply for a CDO. However, the proposed changes suggest the OFT is now just as likely to take action when a director has merely failed to keep himself/herself sufficiently informed of the company's activities as it is when the director is directly involved in the breach. Probably the most controversial proposed change on which the OFT is seeking views is to no longer rule out applying for CDOs where the company in question has benefited from 'Type C' leniency (i.e. the company is not the first to apply for leniency). Under other proposed changes, the OFT may, in exceptional cases, make a CDO application even in the absence of a decision or judgment establishing a breach and/or in the absence of a fine being imposed.

The proposals are intended to make directors take more notice of, and more responsibility for, their companies' activities and it is a warning of the need to ensure greater competition compliance even in the current economic climate. Some of the proposals, particularly those relating to leniency applications, are likely to cause concern, and it will be interesting to see the reaction in the responses to the OFT's consultation and whether these changes survive into the final revised guidance.

Review of distribution arrangements

The European Commission is currently reviewing the application of competition rules to vertical agreements (i.e. distribution arrangements) and on 28 July 2009 it published draft versions of a proposed new block exemption regulation and accompanying guidelines.

The existing regulation exempts vertical agreements from the application of competition rules where the seller's market share is less than 30 per cent. However, under the proposed changes, the 30 per cent market share threshold would now apply to both the seller and buyer. This proposal, supposedly to address concerns regarding increased buyer power, has given rise to much debate, and many have expressed concerns, for example, that it could catch relatively small retailers where they act in small locally focused markets.

Notable changes have also been proposed to the accompanying guidelines. Restrictions on selling via the internet to customers outside an exclusive territory are already prohibited as restrictions on 'passive' (i.e. unsolicited) sales; however, the proposed new guidelines now explicitly set out certain activities that will be considered to be 'hardcore' restraints. These are: requirements to prevent customers in other territories from accessing a website or to terminate transactions if credit card data reveals a foreign address; limiting the proportion of overall sales made over the internet; and requiring a higher price for products to be sold online than for those sold offline.

The proposed new guidelines also provide more freedom where a distributor is selling a new brand or selling an existing brand into a new market, stating that restrictions on passive sales into that territory may be justified for a period of up to two years and that RPM may also be justified in such circumstances. The guidelines also suggest that imposing fixed prices may be justified in relation to short-term (two to six weeks) promotions.

The proposed changes have caused much debate and the commission is currently reviewing the comments it has received in response to its consultation. Final versions of the new regulation and guidelines must be in place by 31 May 2010 when the existing regulation is due to expire.

Record fine

On 13 May 2009, the European Commission announced that it had imposed a fine of EUR 1.06bn on Intel, the world's largest producer of semiconductor chips used in computers. This is the largest individual fine ever imposed by the commission, exceeding the EUR 896m fine imposed on Saint Gobain at the end of 2008 for its participation in the car glass cartel.

Following an investigation launched as a result of complaints from its main rival, AMD, Intel was found to have abused its dominant market position contrary to article 82. In particular, it was found to have given wholly or partially hidden rebates to computer manufacturers on the condition that they bought all, or almost all, of their x86 CPU computer chips from Intel, as well as making payments to a major retailer on the condition that it only stocked computers with Intel chips. Intel was also found to have made payments to certain computer manufacturers to delay or cancel the launch of computers containing AMD's CPU chips.

This case reinforces the fact that the commission is certainly not taking a more lenient approach to enforcement, despite the current global economic problems. An interesting and unusual aspect to the case was that the EU ombudsman reportedly spoke out after the decision to criticise the commission, saying that it had failed to take into account evidence that could have helped Intel's case. Intel is appealing the decision to the Court of First Instance.

Pharmaceutical sector inquiry

In July of this year, the European Commission published its final report in its sector inquiry into the pharmaceutical industry. The purpose of sector inquiries is to examine the workings of a market where it is thought that competition is not working as it should; it is not a targeted investigation into specific suspected infringements of competition.

The report found that it takes too long for generic medicines to reach the market and that fewer innovative medicines are reaching the market. It recognises that these problems are due not only to the actions of pharmaceutical companies, but also to shortcomings in the regulatory framework '“ for example, it refers to an urgent need for an EU patent and patent-litigation system, the need to address the complex pricing and reimbursement systems and the streamlining of marketing authorisation processes.

The commission also identifies a number of practices implemented by pharmaceutical companies which it believes are being applied in an anti-competitive manner such as the use of defensive patent strategies and vexatious patent litigation or opposing marketing authorisations intended to delay/deter generic entry. It appears particularly concerned about settlement agreements, where brand owners make payments to generic manufacturers in return for them delaying entry of generic drugs.

The report stated that the commission would subject the sector to increased scrutiny and would bring specific cases under its competition enforcement powers where necessary. And it has been true to its word, subsequently announcing on 6 October that it had conducted raids at the premises of a number of pharmaceutical companies; reported to include Sanofi-Aventis, Novartis, Teva Pharmaceuticals, Ranbaxy and Ratiopharm. No details of the suspected infringements have been made public, but it is suspected that they may relate to reverse settlement payments.

The inquiry has been the subject of much criticism (beginning with the controversial dawn raids to initiate the inquiry in January 2008) and some argue that the end result does not provide any clear answers and leaves companies in the dark as to precisely what actions will be considered anti-competitive. The report has been toned down from the provisional report published in November 2008, acknowledging the impact of the regulatory regime in the delay of generic entry, but comments in the report and the recent dawn raids show that the commission does not consider the pharmaceutical companies to be without blame.

Sector-specific block exemptions

The last few months have seen the European Commission publish a new block exemption for liner shipping as well as proposals for changes to the block exemptions applicable to the motor vehicle and insurance sectors.

The new liner shipping regulation, adopted on 28 September, extends the existing exemption for consortia arrangements (cooperation of shipping lines to provide joint maritime cargo transport services) for a further five years, subject to certain amendments. The most notable changes to the exemption are a reduction in the market share threshold, reduced from 35 to 30 per cent, and an extension to cover all cargo liner shipping services, rather than just container cargo services. The new regulation enters into force on 26 April 2010.

On 22 July, the commission published its proposed policy orientations for motor vehicle distribution. The commission draws a distinction between the sale of new vehicles (primary market) and after sales service and repairs (after market). It proposes that the former should be subject to the general competition rules on vertical constraints, but that, to ensure a smooth transition, the provisions of the current motor vehicle block exemption relating to the primary market should be extended for three years, until May 2013. In relation to the after market, recognised as being less competitive, it is proposed to apply the general competition rules complemented by sector-specific guidelines and/or an additional sector specific block exemption.

The commission has also published, on 5 October, a draft revised block exemption for the insurance sector. The existing exemption covers agreements for the establishment of non-binding standard policy conditions, the exchange of statistical information for the calculation of risks, the creation and operation of insurance pools as well as agreements on security devices. The revised draft Block Exemption Regulation renews two of the four categories of agreements currently exempted, namely information exchange (specifically joint calculations, tables and studies) and co-(re)insurance pools, with certain amendments. The commission is inviting comments by 30 November.

Despite the above block exemptions looking set to be renewed, albeit in modified format, the streamlining of their scope comes as the commission is looking to remove sector-specific block exemptions altogether, having already done away with the aviation and the liner conference block exemptions. Whether these exemptions will be renewed a further time remains to be seen.